Cash Flow for Interior Design Business
You have probably witnessed interior design businesses that seem to be flourishing yet are delaying in meeting their short-term obligations like paying their employees on time. Probably you have been curious about why the company delays the basic obligations, lets grasp the reasons behind it and clear those doubts and worries.
What is Cash Flow?
Literally like the term, it’s basically how cash spreads out in an organization. Cash operates in three levels in an organization (the operating activities, financing activities, and investing activities). Cash in operating activities is the daily operational usage of cash.
It involves cash related to the income of the company. In financing activities, it is the flow of cash from the channels that fund it. It can be from the non-current liabilities and the owners’ equity.
Non- current liabilities are mainly obligations that are more than a year in operation. The owner’s equity is mainly the firm’s reserves. The firm has set aside finances to shield it or to help it when it needs to expand. Investing activities center on non-current assets.
Therefore, cash flow is a measure of the net transfer of cash and cash equivalents in a business. Through cash flow statements, business owners can determine their financial health in terms of how and where it is concentrating on the usage of their finances.
Read also – How To Stop Losing Money in Your Interior Design Business?
Types of Cash Flows
Cash flow can be either positive or negative. Positive technically implies the flow of funds surpasses the operational levels, it’s more on profitability. Negative cash flow contrasts the positive cash flow. In negative cash flow, the company is unable to meet its short-term obligations. It implies the firm is straining on its operations.
Image Credit: monetohq.com
A) Positive Cash Flows
It implies the net income in the financial statement is more than zero. It has met its obligations and has a surplus to develop its operations. The firm, therefore, has enough working capital and does not need additional funding to support its operations.
Its financial health is sound and appealing to its shareholders. The business is more liquid and can easily convert its finances into cash. The characteristics of firms with a positive cash flow include: the firm is less speculative (less risky), and enhances its holding capacity.
B) Negative Cash Flows
The business tends to spend more money than the income it is generating. The company has spent more on its operations and has utilized all its reserves. It, therefore, needs additional capital to sustain its operations. Its financial health is sick and it requires external funding.
Firms with negative cash flows exhibit the following characteristics: they have unbalanced spending and income, characterized by fraudulent activities, large cash outflows, and numerous actual losses.
Read also – How To Raise Funds for Your Interior Design Business?
10 Tips To Improve Cash Flow for Your Interior Design Business:
Enhancing a business’s cash flow implies there will be more revenue, gross profit, return on investments (ROI), and customer satisfaction and retention levels are raised. There are several tested and tried methods that a business can use to maintain positive cash flows. A company can reduce its operational costs especially its expenses, a firm can experiment with its selling prices, and it can join a purchasing cooperative.
A company can also buy on credit terms, it can practice leasing out and buy out later. A company must track its due dates and forecast its sales, offer flexible payment options, and acquire deposits when purchasing on large orders with large amounts of money. It is wise for a company to send out invoices early, and utilize invoice factoring services.
Read also – 15 Problems Most Interior Design Business Faces
1. Send invoices quickly
Most small businesses do not have computerized systems to help in carrying out the basic financial operations like recording purchases, record accounts receivables, and payables. The business depends on manual operations of writing on paper and using excel sheets to record the transactions.
However, this may not be effective as it is time-consuming, may be inaccurate, and incur errors on omission or commission. It becomes difficult to track invoices sent to customers and by suppliers, taking longer durations following up on unpaid debts which may eventually become irrecoverable. It is, therefore, crucial for the firm to mention its paying terms on the invoices to prevent having bad debts.
The company can take advantage of cloud systems like Deskera to create invoices, send to customers through emails, and track its payments. Before offering your services to a client also ask for a retainer to ensure the client is committed to paying for the services. When they pay before time, you can as well offer discounts to them to retain them and encourage them to pay promptly.
Read also – Interior Design Fees: How Much Does an Interior Designer Cost?
2. Earn deposits for large orders
To earn deposits for large purchases implies the business will have to be financially stable and financially disciplined. It will mean the business will have a track record on how to utilize its resources to avoid incurring unnecessary debts and expenses.
When the company is prompt in paying for its purchase in bulk, it will build a rapport with the sellers hence, it will be easier in getting notifications even through social media when the sellers have offers for their goods and services.
Read also – Interior Design Sourcing and Procurement
3. Provide flexible payment options
A company can diversify its payment options to retain its customers. It can attain financial freedom on its payment plans by incorporating the use of cheques and online payments. It will leave no chance for customers to pay later, therefore, solving the problem of irrecoverable debts.
You can also open a bank account where you will be depositing and withdrawing cash regularly. Keeping the account active is essential to building trust with your bank. In case you need a loan to develop the business, it will be easier as your credit rating will be better. The business will have formed ties with the bank and it will be easier to get financial aid from them.
Read also – The Ultimate Guide To Pricing Strategy For Interior Designers
4. Track the due dates and forecast on sales
Incorporating an accounting system like Quick books will assist the business in detecting and sending notifications on paid and unpaid invoices. The balance sheet will help in implementing the financial plan by enabling the business to know how to maximize its billable potential clients, partnerships and fix payment terms.
It will solve the omission and commission errors and will build on financial discipline for the company. The company’s project management will thus, be able to forecast its sales and view its growth level and limit its operating expenses.
Read also – 16 Interior Design Rules Every Interior Designer Should Follow
5. Lease now, buy later
A business that is liquid enough can develop better and attain new clients. It is wise for a manager to take time and observe the other businesses first and learn from them. Learning from others will help the business avert possible problems. A manager can, therefore, decide to lease out rather than buy out the premises. The saved amount can be used to invest and develop the business.
Read also – How To Pick The Right Interior Design Clients and Projects?
6. Purchase on credit terms
Buying on purchase terms will help a business break down its spending. The manager can decide to use the desired sum to cater for the operational expenses as they earn more income. A manager can also choose an EMI option. A nil EMI and low-interest options will be advantageous.
It will ensure the business has no underlying costs thus, able to generate more income. In critical moments, the company will maneuver as it has no underlying liabilities. It will help the business to avoid taking loans to sustain it when it’s low on its credit card limits.
Read also – How To Find Your Niche As An Interior Designer?
7. Joining a purchasing cooperative
A cooperative draws similar businesses together. They can share ideas and experiences. A business can, therefore, learn from such associations averting common challenges. They also acquire goods and services in bulk hence, getting more discounts. The business can save upon the reduced rates and use them to develop the company.
8. Experimenting with the selling price
Exploring customer elasticity will help the company to take advantage and make more sales. Studying the trends in the market can help the business in either marking up or down. Sometimes marking down prices is a strategy to maintain customers and attract more. It’s part of the business cycle. When the business peaks, the manager can then mark up the prices to ensure profitability.
Read also – 13 Expert Tips To Get New Interior Design Clients
9. Reduce operational costs
The best way for a business to be disciplined and grow is to reduce its operational business expenses. Cutting down on its expenses will reduce wastage. It will also imply negotiating on process costs that suit the business terms.
It ensures the business enjoys all possible discounts by negotiating penalties and late payments with suppliers. A company using a point of sale system, for example, will be able to trace where it is spending more resources and weigh if it is necessary and make corrections on it. As you reduce your expenses, it is also important to save them in a financial entity that will help you accrue interests. You can invest in money markets and watch your finances grow.
Read also – 23 Best Ways To Market Yourself As An Interior Designer
10. Utilize invoice factoring services
It means other companies purchase the company’s invoices at reduced rates. In exchange for the discount offered by the company, the other companies will pay the invoiced amounts immediately. The factoring company will take some cut of the money earned but, your company will not be stuck waiting for customers. Hence, the company will make profits in the process.
The company will improve on its cash flows hence, maintaining its liquidity. A financial advisor or a bookkeeper can also guide the company to know where the business stands financially and make adjustments to enhance profitability. It is also wise to note the vendors that are willing to wait for payment and the ones that will charge fines for late payments.
A business needs to stick to a budget or have a business plan. A budget will enable the manager to make sound decisions on what to purchase, at what time, when to give discounts, when to collect its accounts receivables, when to deliver its payables and when to invest in more stocks and assets.
Seeking help from financial advisors or experts in interior design services is also a sure way to know where the business stands and its financial health. It will enable the business to make adjustments and focus on the growth of the company or its new business.
The manager should test the customers’ loyalty by asking for a retainer before delivering their products and services. They can as well build sound relationships by offering them discounts upon prompt payments. It will encourage the customers to be diligent hence, it will foster good relationships. However, when they pay late, also charge them penalties so that they are more cautious next time. Choosing a consistent time when the invoices are due will avert possible problems.
You can improve your inventories by marking the slow-moving goods and the fast-moving goods. From the inventory check, you will make informed decisions on what to concentrate on adding and reducing to attain your financial goals by having enough money in your design projects.
Read also – Sales Tax and Accounting Basics For Interior Designers
When your cash flow is not serving your expectations, it is also essential to raise your prices. However, you may need to consider several factors before based on that option. First, consider how your competitors are charging, consider if the prices for inventories have increased, and consider the manpower the inventory assembly or services require.
Check if your prices compensate with the time used in creating the products, and when the overall prices are low, ask yourself if the company offers cheap products or valuable ones. If your prices are too low, you may be underselling your products and will make the customers view them as less valuable.
When expanding your sales market, seat down with your team and brainstorm on how to raise your business. You can consider adding new services or products, creating a new marketing strategy, encouraging your customers to buy more, and not forgetting your loyal customers. You can think outside the box and consider alternative ways to increase your income.
If the products you are offering are already in the market, consider changing your marketing strategy mix by changing your packaging, offering different flavors and ingredients. You can encourage customers to buy more by increasing the bundle items. You can sell similar items together. It will encourage more spending.
You can as well advertise related products by using an e-commerce platform. Implement reward programs like stamp cards for multiple purchases. You can also incorporate a referral program to encourage loyal customers to grow your business through the word of mouth.