While many designers are experts at completing a remodel in it’s entirely, reading their financial statements is more of a foreign task. We have offered our advice on what to look for your financials in order to gain a clearer view of your company’s financial health.
Profit & Loss Report:
Let’s start with the confusion of having one report with multiple names. Those in the industry tend to refer to this report as the P&L, which is short for profit and loss. Income Statement is another popular name used frequently and Revenue Statement, Operating Statement and Earning Statement are other names used for this report.
Formula for the Profit & Loss Report:
No matter what your accountant decides to call you P&L, one common formula is used to determine your Net Income or Loss.
Sales – Costs = Net Income or Loss
Sales: For interior designers using Ivy, we have created your mapping to reflect your different revenue categories. For managerial purposes, this allows
Costs: We created counter costs to match to the same income accounts mentioned above for interior designers using Ivy. Our Ivy interiors designers can compare the two numbers and truly gange where they are losing money. For example, shipping does not include markup so the income and the cost should match up relevantly close. The exception is if a designer waived the shipping for a client, then the costs will outweigh the income collected for shipping.
Gross Profit is the amount left after your total cost of goods sold is subtracted from your sales. A very useful metric for designers and included in your yearly financials from
Gross Profit Margin measures the financial health and business model of a design firm by determining as a percentage what is remaining once cost of goods sold are accounted for against your sales. Keep in mind that this metric does not include other business expenses.
Next on the Profit & Loss are all your other Business Costs categorized based on your business and accounting principles. Business costs should be reflective of your gross profit. For example, a designer with lower gross profit will typically have less business expenses than a design firm with a higher gross profit. The main reason for this is that your business costs will increase as your business grows and decrease if your business declines.
The last and most important calculation on the P&L is Net Income. Your Net Income includes all sales, cost of goods sold, business expenses and taxes if related to the business. Check out our blog on “How Designers Can Increase Net Profit in 2019”
Statement of Cash Flows:
The Statement of Cash Flows summarizes the cash entering and leaving the company. This report is not used as frequently as the P&L. Designers should review this report doubling checking for anything that looks out of the ordinary and report it to your bookkeeper to correct.
If you new to the world of financial reporting, our advice is to focus on (in order of importance) the P&L and secondly the Balance Sheet. The Balance Sheet lists all your current assets, long term assets, current liabilities and long term liabilities along with owner’s contributions and equity.
Important Categories for Interior Designers on the Balance Sheet:
- Accounts Receivable – This amount should show what amount in invoices are still open or not collected. If the number is negative it could indicate any unapplied payments.
- Undeposited Funds – Retainers could be in this account along with any funds not yet matched to an invoice.
- Accounts Payable – Includes any open Bills and indicates what is still owed to vendors.
- Ivy Not Matching – We created this account as a suspense account where unmatched bill payments are moved to so they do not show up on the P&L Report. We can not stress enough how important it is to post the correct payment amount on all purchase orders to avoid a large balance to this account. Our newer clients tend to have a larger balance due to having a previous bookkeeper who was not familiar with the Ivy & QBO Integration.
- Sales Tax Due & Paid Tax: The amount due for your sales tax will show up on the balance sheet since it is a
- Equity are all designer’s investments to the company minus owner’s draws.
Tip: Look out for negative number on your balance sheet! While there are expectations, for the most part owner’s draws should be one of the only negative account balance on your balance sheet.
Cash vs. Accrual Accounting:
Refer to Marissa Mckinney’s Article for Ivy Magazine describing the difference between Accrual & Cash Account – Click here to read her article thru Ivy