3 Reasons Interior Designers Should Stop Accepting Payment on Proposal

May 15

Have you ever looked at your profit and loss statement and thought, “I know I made more money than that - but where did it go?”

Or, have you reached the end of the tax year only to be hit with a huge income tax bill you were not expecting?

Ugh. How in the world does this happen?

The culprit is almost always due to interior designers accepting payments on proposals. Untangling the mess of connecting the right payments to the correct proposals is tough - and totally fixable. Our new clients often experience one or both of these scenarios before they start working with us, and we help ensure these headache-inducing situations don’t happen again.

Why Interior Designers Should Stop Taking Payments on Proposals

We get it. You want to take payments on proposals because the list of things that could go wrong is endless: the item may go out of stock, the item may arrive damaged, the client may hate the item, etc. Taking the payment on the proposal might seem like the safer option – as it allows you to update the proposal, then convert it to an invoice when everything is said and done.

Sounds great, right?

In theory, sure, but as professional bookkeepers who specialize in the interior design industry, we have a few reasons why you should stop accepting payments on proposals:

Proposals are not considered true financial documents.
By accepting payments on proposals, your sales tax liability is inaccurate.
You’re busy. Backtracking and remembering to convert documents after you’ve already moved onto the next phase is hard.

Let’s break it down even further.

1 | Proposals are not considered true financial documents.

Proposals do not show up on your profit and loss (P&L) statement. Proposals are considered estimates, which means the income is not accounted for until the proposal is converted to an invoice.

If you accept payment on a proposal and forget to turn that proposal into an invoice, your financial records will show that you have no income or sales tax liability, as though you haven’t earned the money. There are many tax implications here, both with your income tax return and your sales tax returns. And if you’re delayed with remitting the taxes you owe, you will then also be subject to penalties and interest.

2 | By accepting payments on proposals, your sales tax liability is inaccurate.

Depending on your state, your sales tax may be due upon invoicing (accrual basis) or upon receipt of payment (cash basis).

In some instances, we’ve seen clients attempt to do this on purpose because they cannot pay their sales tax liability balance. Trust us, that never ends well for the business owner.

When you apply payments to invoices rather than to proposals, the accounting process is clear, and you then have a better understanding of where your money is and what will be owed in taxes.

3 | Interior designers are too busy to remember every financial detail.

Finally, you’re busy. We often hear clients say, “Well, I had planned to convert the proposal to an invoice later, but then I forgot.”

We’ve all been there. Backtracking and remembering to convert documents after you’ve already moved onto the next phase is hard. It’s better for you and the financial health of your business to simply do it correctly from the beginning.

Ideal Invoicing Workflow for Interior Design Businesses

We recommend that our interior design clients follow this invoicing process:

Prepare and present your proposal to the client.
Once the client has approved the items on the proposal, collect payment on a retainer. You can even name the retainer something specific such as, “Johnson Living Room Furniture Retainer.” This retainer will not show as income yet on your P&L statement. It will show as a liability on your Balance Sheet.
After you place the order and confirm that everything will ship as expected, convert the proposal to an invoice and apply the retainer.

As always, there are nuances with all business process recommendations. It is important to understand the difference between a cash-based business and an accrual-based business. You need to know how your CPA files your income tax return, as well as the rules your state has for sales tax remittance.