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Bookkeeping for Interior Designers: A Comprehensive Guide

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A man working in a building floor plan interior design.

You can master bookkeeping for interior designers with a simple system and a few tips. Sounds too good to be true? Read on and find out how easy it can actually be if you just put in some time and effort to set it all up.

 

Why Bookkeeping is Essential for Interior Designers

Bookkeeping for interior designers is a must-do task because it impacts so much around the business. Below are the key areas affected.

  1. Accurate records give you a clear picture of your business’s profitability, cash flow, and liabilities. 
  2. Without accurate financials, you cannot comply with tax regulations or claim all your allowed deductions.
  3. Improperly tracking income and expenses messes with your budgets for future projects. This can lead to overspending and not having enough cash flow to cover financial needs. 
  4. Improper financial planning hinders long-term sustainability.
  5. Spotty financial records prevents you from understanding true project profitability. You won’t be able to identify areas for improvement to grow your business. 
  6. Inaccurate tracking can lead to incorrect client billing, which can lead to missed payments and lost trust in professional relationships.
  7. Poor financial records can turn away lenders and investors because it makes you look untrustworthy. 

 

Impact on Business Decisions and Growth

Accurate bookkeeping shows you which project types are the most profitable for your business. You can then prioritize the ones that maximize your return on investment and strategically target these ideal clients.

When you can properly analyze project costs, accurate service pricing is possible. YOu can also identify areas for savings so you remain competitive while ensuring healthy profit margins.

Your books show you where your money goes so you can allocate resources efficiently. Then, you can also forecast future revenue and expenses. This way, you can plan for growth safely and reinvest profits based on accurate financial insights.

 

Setting Up Your Bookkeeping System

A woman using a smartphone at a computer desk.

 

Choosing the Right Bookkeeping Method

Cash basis accounting is the simpler of the two main methods. It works for smaller design firms like startups. You record income when you receive cash and expenses when you actually pay them. This is easier to manage, but does not give you a complete picture of your financial health.

Accrual accounting is the more comprehensive method, making it ideal for larger and growing businesses. You record income when it’s earned, even when clients have not yet paid. Similarly, you record expenses when you incur them, even if you bought them on credit and have not actually paid yet. 

The accrual vs cash basis method gives you a clearer picture of your financials because it tracks outstanding invoices and accounts payable. It allows you to track materials purchases and subcontractor work accurately. Tax authorities also generally prefer accrual accounting. 

 

Selecting Bookkeeping Software

Using software can significantly streamline your bookkeeping process and reduce errors. Many popular accounting software solutions cater to accrual accounting, so prioritize these.

  1. FreshBooks has a user-friendly interface and streamlines invoicing, expense tracking, and automatic bill pay. It also integrates with popular project management and time tracking tools. FreshBooks is more suitable for freelancers and small businesses, so it has affordable pricing plans.
  2. Wave is free accounting software with basic invoicing, receipt scanning, and expense tracking. It’s also best for startups or small businesses. You can upgrade to a paid version to access more features or buy add-on services like payroll and online payments.
  3. QuickBooks Online is a robust tool that caters to businesses of all sizes. It boasts a wide range of features like project tracking, inventory management, and payroll. It integrates with various business apps and tools, and can easily accommodate growing interior design firms. QuickBooks Online does have a steeper learning curve and higher pricing, though, since it’s more comprehensive. 
  4. Xero is easy to use and built to scale. This makes it ideal for growing and mid-sized design firms. It offers strong features for project management, bills payment, and payroll, plus real-time financial reporting. It also integrates with a number of business apps. Xero is slightly more expensive than FreshBooks because it offers more features for larger businesses.
  5. Mydoma Studio is design business management software with purchase order, invoicing, time tracking, and other features. It is not as robust as other options for general accounting needs, but also offers integrations with other design software.

 

Creating a Chart of Accounts

  1. Create an Assets account with categories for Cash, Accounts Receivable, Prepaid Expenses, Inventory, and Office Equipment.
  2. Create a Liabilities account with categories for Accounts Payable, Salaries Payable, Taxes Payable, and Loans Payable.
  3. Create an Equity account with categories for Owner’s Equity and Retained Earnings
  4. Create an Income account with categories for Design Fees, Project Management Fees, Consultation Fees, and Product Sales.
  5. Create an Expenses account with categories for Cost of Goods Sold (COGS), Subcontractor Fees, Software Subscriptions, Marketing and Advertising, Office Expenses, Payroll and Benefits, Travel Expenses, and Professional Fees.

 

Managing Income and Expenses

A calculator, notepad, and pen on top of dollar bills.

 

Tracking Income

 

Invoicing and Accounts Receivable

The most common method of recording client payments and project fees in bookkeeping for interior designers is to track invoicing and accounts receivable.

Use professional invoices that clearly describe your design services, agreed-upon fees, payment terms, and any applicable taxes. Assign a unique invoice number for each one.

Once you send an invoice, record the total amount due under Accounts Receivable in your chart of accounts. When a client pays, record the amount against the matching invoice and subtract it from the Accounts Receivable balance.

Deposits and Progress Billing

When you’re dealing with larger projects, we recommend that you collect a deposit upfront from the client. This is the method that focuses on progress billings after the initial deposit, which is typically a percentage of the total project fee. 

Create a separate account category to record deposits. As you reach specific stages of project completion, issue progress invoices. Move a portion of the deposit and subtract it from Accounts Receivable to reflect the remaining balance due. 

Project Management Software

You can use project management software that integrates with accounting software. You would create and track projects and create invoices within the design software. Your accounting tool would get automatic updates in the corresponding accounts.

Point-of-Sale (POS) Systems

A POS system works well if you sell design-related products. Integrate it with your accounting software to capture sales transactions automatically and update your inventory and income accounts.

Recording Expenses

Bookkeeping for interior designers gets easier when you apply good tips for categorizing and recording expenses. 

We recommend using subcategories under the main expense categories mentioned in the chart of accounts section. For individual project expenses. This keeps each project’s expenses separate for accuracy and also to analyze profitability. 

Always include clear descriptions of what was purchased and for which project when recording expenses. This is helpful for costing analysis.

Keep the terminology consistent but use unique project tags to avoid confusion.

Create and follow a system for collecting and storing receipts. This is crucial for tax purposes, on top of maintaining complete documentation. We recommend digital scans stored in the cloud with monthly local backups. 

 

Handling Tax Obligations 

A notebook and pen on top of tax documents.

 

Understanding Tax Requirements for Interior Designers

  1. Income tax on your net profit is the biggest tax consideration in bookkeeping for interior designers. The specific tax rate depends on your business structure: Sole Proprietorship or Single-Member LLC Partnership or Multi-Member LLC C Corporation
  2. If you are a sole proprietor or file as a single-member LLC, you will pay self-employment tax, too. This is for Social Security and Medicare.
  3. You must make estimated tax payments throughout the year based on your projected tax liability.
  4. If you sell design items, you might need to collect and remit sales tax. Look into your state’s sales tax rules.
  5. Some locations collect additional state or local income taxes, or business taxes. Check with the authorities or hire a professional to advise you on your obligations.

 

Preparing for Tax Season

Make sure you have records and backups of everything, and clear labeling for all your categories. Retention periods vary, but you should typically keep documentation for 3-7 years.

Consider outsourcing to an experienced bookkeeper to make sure your records are in order. You can hire them to check your books or keep one on if your bookkeeping tasks become overwhelming or complex.

Consult a tax professional to be sure you understand your tax obligations and to get advice on tax-saving strategies, too.

 

Tips for Reducing Tax Liability 

Our biggest tip is to simply maximize your business deductions:

  • Track all your business expenses meticulously, no matter how small. 
  • Know the common tax deductions for interior designers, like home office expenses, business vehicle expenses, continuing education fees, professional development costs, interest on business loans, and self-employed health insurance premiums. 
  • Deduct depreciating assets over their useful lifespan. 
  • Strategize to have enough available cash flow to prepay certain business expenses towards the end of the tax year. 

You should also choose the right business structure to begin with. Consider consulting a tax professional for this. 

If you’re self-employed, we also recommend that you contribute to a Solo 401(k) or SEP IRA. Contributions to these retirement plans reduce your taxable income. If you have employees, you can look into retirement plan options for them, which will further reduce your taxable income.

 

Best Practices for Bookkeeping Efficiency

Regular Tasks in Bookkeeping for Interior Designers

  • Every day, ideally, record all your incoming revenue
  • Record all your business expenses at least once a week and categorizing them according to your chart of accounts. 
  • Reconcile your bank statements with your bookkeeping records after recording your expenses. 
  • Check your accounts receivable every month and follow up with clients for overdue payments. Pay your upcoming bills, too.
  • At the beginning of each month, look over your reports and use the insights you gain to improve your business. 
  • Every quarter, look back at project costs and income to assess profitability and make improvements to your pricing strategy. 
  • If required, make estimated tax payments.
  • Generate a complete set of financial statements at the end of your fiscal year, ready for tax filing. File your business tax return along with all of the required documentation.

 

Avoiding Common Bookkeeping Mistakes

  • Always choose and consistently use a bookkeeping system.
  • Never procrastinating on bookkeeping tasks
  • Pay close attention to project costs. 
  • Double check that you’re properly categorizing all your expenses. 
  • Always set aside ample funds for taxes.
  • Seek professional help when needed.

 

Frequently Asked Questions

Two men collaborating on bookkeeping interview questions.

 

What bookkeeping software is best for small interior design businesses?

Mydoma Studio: Designed specifically for creative industries like interior design. Integrates with design software and offers features tailored to project management and cost tracking for design projects. This specialization comes at a premium price point compared to some general-purpose bookkeeping software options.

 

How often should I update my bookkeeping records?

We recommend daily updates for businesses that process a large number of transactions every day. Weekly updates are best if you have a few daily client payments and expense purchases. If you only handle a few client payments and expense purchases every two weeks or so, you can do bookkeeping bi-weekly or even monthly.

 

What are the most common tax deductions for interior designers?

Interior designers can claim the following business expenses as tax deductions:

  • Home office rent, mortgage interest, utilities, and homeowner’s insurance.
  • Design software, project management tools, accounting software, and other business-related subscriptions.
  • Computers, tablets, and other devices and equipment used for the business. 
  • Office supplies like ink, paper, and planners.
  • Marketing and advertising expenses like website development, social media marketing, brochures, and business cards.
  • Educational courses, workshops, conferences, and seminars related to interior design.
  • Samples and materials used for client presentations.
  • Business travel and client meeting expenses.
  • Fees paid to accountants, bookkeepers, and lawyers for business purposes.
  • Health insurance premiums.
  • Interest paid on business loans.

 

How can I ensure my bookkeeping records are audit-proof?

  1. Maintain an accurate chart of accounts with correct income and expense categories, clear descriptions, and complete details.
  2. Keep all your business transaction documentation organized in one place. 
  3. Reconcile your bank statements with your accounting records at least once a month, and rectify any discrepancies.
  4. Use the right accounting software and project management tool to keep your records tight.
  5. If you sell design-related products, maintain accurate inventory records.
  6. Back up all your records and do a fraud checkup at least once a month.

 

What should I look for when hiring a virtual bookkeeping assistant?

Always focus on VAs with experience in bookkeeping for your business size, preferably specific to the interior design industry. Shortlist candidates who are proficient in the bookkeeping software you use. Ask about certifications like QuickBooks ProAdvisor or Xero Certified Advisor, which indicate expertise.

Every hire should have excellent written and verbal communication skills. Assess their ability to understand your specific business needs and tailor their approach accordingly.

 

What Is AccountsBalance?

accountsbalance

AccountsBalance is a monthly bookkeeping service specialized for agencies & SAAS companies.

We take monthly bookkeeping off your plate and deliver you your financial statements by the 15th or 20th of each month.

You’ll have your Profit and Loss Statement, Balance Sheet, and Cash Flow Statement ready for analysis each month so you and your business partners can make better business decisions.

Interested in learning more? Schedule a call with our CEO, Nathan Hirsch.

And here’s some free resources:

 

 

In Summary

This simple system is all you need to maintain accurate bookkeeping for interior designers. Although the world of design can be hit and miss, feast or famine, your books don’t have to live in that chaos.

 

Want help with your bookkeeping? We make it easy. Get startedSpeak w/ a Founder, or Schedule a Callback

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Julia Valdez

Julia Valdez

Julia is a career freelancer and agency owner turned coach for those seeking abundance and victorious living. A professional teacher and decades-long lover of the art of words on paper and the stage, she loves sharing actionable advice on life-changing topics. When she’s not helping freelancers and other small business owners grow, you can find her sharing lots of laughs over little crazy things.

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