This article is written by someone who also hates bookkeeping.
Like 95% of the designers I know, I view bookkeeping as a necessary evil. Thankfully I work with a talented group of bookkeeping professionals that, believe it or not, actually enjoy it. The reality is you don’t have to like or even understand the importance of good bookkeeping. However, if you want financial peace of mind, you need to maintain clean books or—better still—have someone that you can trust maintain them for you.
After 25 years serving the design industry, I truly believe interior design to be the single hardest type of small business to manage. Even the smallest design project requires extreme amounts of paperwork and accounting. Each purchase requires one or more orders with payments to vendors, paired with one or more invoices with payments from customers. The reality is that most traditional bookkeepers and accountants simply don’t understand the challenges specific to our industry, meaning you may be forced to either run your books yourself or spend a lot of time explaining to your bookkeeper how the business operates.
For those who are taking on an outsized bookkeeping workload themselves, the three most common fatal mistakes I see are:
- Keeping too many accounts unreconciled for too long of a time
- Forgetting to categorize your income and expenses or coding them incorrectly
- Not separating business and personal transactions
Let’s go over each of these mistakes to see how they can hurt your business and how you can prevent them from affecting you.
Bookkeeping Mistake: Keeping too many accounts unreconciled for too long of a time
Bookkeeping Advice: Reconcile your accounts at least weekly
Reconciling your accounts regularly brings these unpaid invoices to light and prevents you from accidentally paying for clients’ purchases out of pocket.
Busy design firms have money flowing in and out and all over the place. If someone in your office is not reconciling and monitoring your money in and out, you open your business up to mistakes or even fraud.
Prior to joining Fuigo, one of our members suffered from poor reconciliation habits. Because their bookkeeper left transactions unreconciled, they forgot to collect over $20,000 from one of their clients. The unpaid invoices were simply lost in the tangle of seemingly random transactions littering their books. We found the discrepancy when they joined Fuigo, but by then the project had been finished for six months and the designer was ultimately unable to collect the amount due.
It’s critical that you have someone reconcile all of your accounts—not just your checking account and main credit card—every week, at a minimum. Our bookkeepers at Fuigo reconcile accounts on a daily basis and in the process have collectively saved designers hundreds of thousands of dollars. All too often designers invoice clients and forget to collect on said invoice, or incur reimbursable expenses but forget to bill clients for them—it’s a nearly unavoidable consequence of having so many invoices and bills open at once. Reconciling your accounts regularly brings these unpaid invoices to light and prevents you from accidentally paying for clients’ purchases out of pocket. We’re running businesses here, not charities!
Bookkeeping Mistake: Forgetting to categorize your income and expenses or coding them incorrectly
Bookkeeping Advice: Make sure your general ledger accounts are set up correctly and code your transactions in a timely manner
As a business, you are entitled to business deductions. Your tax professional’s goal should be to maximize your legitimate deductible expenses in order to reduce your tax burden. However, you can’t benefit from following the rules if you can’t validate your business expenses, and not maximizing your deductions can significantly affect your profitability, even bankrupting your company.
Additionally, incorrectly categorizing transactions as taxable or non-taxable can invite a sales tax audit. The way I see it, the state sales tax authorities go after low-hanging fruit. Since every audit they perform on an interior design company uncovers tons of discrepancies and unpaid sales tax, they continue to target our industry. If your books are not immaculate, a sales tax audit could cost you hundreds of hours and tens of thousands of dollars in accountant fees.
A few years back, one of our vendor friends was targeted for a sales and use tax audit for $1.4 million. After one year and $35,000 in accountant fees, the vendor managed to get their penalty down to $140,000. So unless you have a spare $100k+ lying around, you probably want to make sure you code your transactions correctly, in a timely manner, and in compliance with not just sales tax but also use tax laws.
To solve this problem on the income side, nothing beats good project management software. Apps such as Fuigo automatically push proposals, invoices, and client payments into your books, ensuring that your books exactly match the documents you send your client—and with the correct sales and use tax rates, to boot. Good project management software will even break out your client payments into furnishings money and design fee money, so you know what money belongs to you vs. what money is earmarked for purchases.
On the expenses side, we recommend that you tag your expenses on a weekly basis and upload your receipts as soon as you can. Most modern web-based accounting systems such as our partner Xero have apps with built-in receipt uploading and reimbursement requesting, and there are a few great third-party apps such as Expensify that do the same thing even if you don’t have web-based books. Tagging expenses as soon as they occur will prevent you from forgetting which expenses to bill back to which client, and uploading receipts as soon as you can will prevent you from missing out on deductions through either miscoding expenses or simply losing the receipt.
Bookkeeping Mistake: Not separating business and personal transactions
Bookkeeping Advice: Always keep your business and personal expenses separate
The IRS will find a reason to justify an audit if given the opportunity—but you can prevent this with some simple bookkeeping discipline.
While you may think “my money is my money, no matter the account”, commingling your business and personal funds can create an accounting disaster. Not only can doing so create an incredibly large amount of work for you and your accountant come tax time (as you both have to manually categorize every expense as business or personal), but you could also accidentally get your business categorized as a hobby by the IRS, preventing you from claiming everyday business expenses as tax deductions. Even worse, mixing business and personal funds is an all-too-common trigger for an audit. Did you know that generally the IRS audits can include returns filed within the last three years, but usually no more than 6 years? This means all the receipts, purchase orders, invoices to name a few must be made available in case of an audit.
As a real world example, my mom owns a home furnishings retail store and interior design firm in North Carolina. She’s been around for almost four decades and has six different corporations under the Circa banner. A few years back, a state inquiry into using a corporate car for personal trips ultimately led to full audits across all six corporations. While everything was completely fine in the end, the process consumed nearly a year of her time. The IRS will find a reason to justify an audit if given the opportunity—but you can prevent this with some simple bookkeeping discipline.
Simply put, we advise that you do not use your personal credit cards or checks for business expenses, and that you do not use your business accounts or assets for personal expenses or uses. Keeping your business and personal finances separate will make it easier to take proper deductions, to reconcile both your personal and business accounts, and to avoid potentially hefty fines and overall unpleasantness from the IRS and State Department of Revenue. Not to mention you’ll have a much cleaner view of your business’ health if you don’t have Owner’s Draw transactions littering your books.
We recommend that you not only keep your business and personal funds separate, but that you also keep your client deposit money in a separate account from your business income. Even if you don’t reconcile often, meaning you don’t have a true idea of how much cash in your bank truly belongs to you, keeping client money earmarked for purchases in a separate bank account is an easy way to prevent you from accidentally spending it on personal or non-project business expenses.
Of course, good software can make managing all this easier. At Fuigo, we’re dedicated to helping designers scale their businesses through good tools, clean books, and better business practices. But even if you don’t make any changes in your project management, simply cleaning up these three things will not only give you peace of mind, but can actually help you make more money.