Interior Designers Ask Us these Money Questions All the Time

Jun 28

bookkeeping and accounting services for interior designers

Running an interior design business isn’t easy - but very rewarding - and it can be quite profitable when done correctly. As a bookkeeping firm that specializes in helping design businesses become more profitable and financially efficient, we find that most of our clients come to us with the same initial questions. These questions range from how much they should pay themselves and what their pricing should be to how to address sales tax for out-of-state projects.

Consider this the cliff-notes version of interior design financial basics that every home professional should know. Enjoy!

The Basic Money FAQs

How much should I pay myself as the owner of the design firm, and how?

The how much portion is considerable and complex and is precisely what our Financial Analytics program is designed to answer. However, the how part is easy. You must transfer funds from your business account to your personal account (using a check or a bank transfer). It is imperative to stop using business funds for personal expenses (like your Netflix account or a morning shopping session on your Nordstrom app).

Mixing your business and personal finances can cause a number of long term problems for both you and your business, including….

Making your business look unprofitable because money is being allocated to the wrong places
Making you personally liable to cover any unpaid business income tax, which can result in the confiscation of your home and vehicles to cover the costs, if necessary
Making it impossible for you to budget correctly because your overhead expenses include personal purchases or subscriptions

How do I know if my interior design and decorating projects are profitable?

You must track everything you buy for a project and use purchase orders or tag expenses to a client directly in QuickBooks. Interior designers often forget to include expenses such as styling goods, installation supplies, and final freight and shipping amounts, which are then not billed to the client and thus lower the overall profitability of their projects.

What is an appropriate hourly rate for my firm (based on location)?

To determine your hourly rate, you have to understand the total cost of doing business. Your cost of doing business is a simple formula:

Your annual total operating expenses (including any owner’s draw and debt payments) divided by the total number of hours that your firm can work in a year.

That calculation will tell you what your firm’s hourly rate is.

Should I bill my interior design clients hourly or at a flat rate?

The best invoicing strategy is the one that works for you and your clients. Hourly invoicing can be more time-consuming on the admin side, but it protects you when your clients push the boundaries of your scope of work.

Flat fee billing can be more transparent to your client and less administrative, but you risk not being compensated for boundary-pushing clients. Either way, our bookkeeping firm can provide project profitability reports so that you can understand how much profit you made on each project, regardless of invoicing style, to make the best decision going forward.

Can I afford to rent an office or studio space for my interior design business?

Once again, this type of question is what our Financial Analytics program is for. We can focus on forecasting and determining your monthly revenue to “break-even” given the expenses of renting or owning a space.

What interior design project management software do you recommend?

Project management software recommendations depend on your needs as a designer. To start, we always recommend that you use QuickBooks Online. The other tools you add after that will depend on your needs.

For reference, 68% of our interior design clients use HouzzPro and 15% use Design Files. Design Files is great for small to medium-sized firms, while we find that Houzz Pro or Materio is better for larger firms due to their more robust planning features and integration with QuickBooks Online.

How much money should I set aside for federal and state taxes?

It is imperative to set aside money for taxes all year long. We recommend that our clients allocate 15-20% of their revenue to a tax account and open a separate bank account to hold these funds.

At a minimum, we recommend doing this quarterly, but many clients succeed with doing it every time they receive a payment from their client.

Are all business-related meals deductible?

In 2023, the COVID-era percentages reverted to how they were defined in the Tax Cuts and Jobs Act.

Entertaining clients (concert tickets, golf games, etc) - 0% deductible
Business meals with clients - 50% deductible
Office snacks and meals - 50% deductible
Company-wide party - 100% deductible

Should I be tracking my mileage related to design jobs?

There are two ways to write off mileage, and you should consult your CPA about the best method for your business.

Mileage Method: If you use your personal vehicle for work, you can use the standard mileage rate for every mile you drive for business purposes. As of 2024, the standard reimbursement rate is $0.67 per mile.

Expense Method: The actual expense method requires you to record every expense related to your business vehicle and report the total on your tax return. This includes gasoline, insurance, car lease payments, depreciation, new tires, parking, and tolls.

If your vehicle is both business and personal use, you can only deduct a percentage. For example, if 15% of the miles you drive in 2024 are for work, you can deduct 15% of your total vehicle-related expenses this year on your tax return.

Note…If you put gas, insurance, maintenance, etc on your business accounts, then you do not reimburse yourself the $0.67/mile. It’s an either / or situation and you do not get to use both methods simultaneously.

If I’ve never used accounting software before, how will you update my books? And will you work with my messy spreadsheets?

We will import your spreadsheets, bank and credit card statements, receipts, invoices, and bills into a new QuickBooks Online (QBO) account. Your new QBO account will be a streamlined and centralized place for all your financial information, making it easier for you to understand the money side of your business and facilitate good financial decisions.

If I’m already set up with accounting software, will you use what I have or will I need to move to a new platform?

We exclusively use QuickBooks Online accounting software. If you already have an account set up, that’s great! You can invite us to your account, and we can get started right away. If not, we’ll work with you to create your account.

The High Level Money FAQs

How much should I mark up the products that I’m ordering wholesale for clients?

This depends entirely on your location, the type of product, the client, and the vendor. However, we recommend never passing your discount on to your client, as that would be stealing profit from your business.

Why is it important to purchase from wholesale vendors vs. retail vendors?

When you purchase retail, you lose the ability to mark up the item. You can’t put a markup on an item the client could buy themselves. Reselling retail items is also a sales tax nightmare. We recommend that our clients purchase from retail vendors as little as possible.

How much should I spend on marketing and advertising?

This is why project profitability is so important. Once you know which projects give you the best profit margin, you can target your marketing and advertising towards these projects and clients.

However, as a rule of thumb, Forbes recommends spending 5-10% of revenue towards marketing if you want to maintain current revenue values. They recommend increasing marketing spend by up to 20% to achieve rapid growth.

What is the purpose of purchase orders when I am buying things online?

Using purchase orders (POs) to track the items you buy for your clients (cost of goods sold or COGS) is the only way to truly understand your profitability on a project level. The invoice is documentation of how much you sold an item for, and the purchase order is documentation of how much you spent on an item. The difference between these is your profit. Without the PO, you are missing a key part of the equation.

How should I invoice shipping to my client when I do not know the exact amount when I place the order?

We recommend using a flat-rate shipping model. This is best for the client experience since you won’t be coming to them at the end of a project with a final invoice of ancillary charges. We typically recommend charging 20% of an invoice for shipping and freight. If you monitor your project profitability, you can adjust that up or down based on your client, location, item type, etc.

How do I handle the sales tax for out-of-state projects?

Out-of-state sales can trigger an “economic nexus” by reaching a certain amount of sales and/or number of transactions in another state. You will have to register to collect and remit sales tax in states where you have economic nexus.

The thresholds range from $100,000 in sales to $500,000 in sales, so depending on the size of your project, you may trigger economic nexus with one project.

How do I know if I can afford to hire a junior designer?

A good rule of thumb is to keep payroll expenses under 30% of total revenue. If you are below 30%, you can likely afford to hire a new employee. If not, you likely need more revenue to support this person. It is also important to remember that there are ancillary costs for having someone on payroll, including payroll taxes, payroll processing software fees, and benefits.

How do retainers work, and are they appropriate for my design firm?

Every designer can use retainers. Upon collection, retainers show as a liability on your Balance Sheet. They are not considered income until you apply the funds to an invoice. Retainers reduce unpaid Accounts Receivable, which drastically improves cash flow. If you take retainers from your clients, you can avoid having overdue or unpaid invoices. You can also avoid the dreaded “nightmare client” situation in which a client will refuse to pay you the amount owed at the end of their project due to their own personal opinions and emotions.

How do I know if my overall business expenses are aligned with my income?

The popular cash management solution as outlined in the book Profit First, recommends that business expenses be no more than 30% of revenue. You can accomplish this by increasing revenue or decreasing expenses.

In our experience, business owners typically overspend. Reviewing your monthly financial reports is a great way to keep up with your spending so you can cut back if needed.