3 Bookkeeping Mistakes Interior Designers Make with Morgan Boudreaux

In today's episode, Morgan Boudreaux, from Business by the Book, a full-service accounting firm that works directly with interior designers across the country joins me. Business by the Books started as a family-run business founded by Morgan's mother, Sherry Wilson. Today they have a team of bookkeepers who are passionate about taking care of financial tasks so that their clients can do the things that they love, design, create and build successful businesses and spend time with their families. They have been my personal and trusted bookkeepers for four years and I can share firsthand the difference when working with their team who truly understands finances around interior design businesses.

Morgan shares with us all about reporting and understanding your business's financial statements, and the difference between cash and accrual accounting, and then shares the top 3 bookkeeping mistakes that interior designers make.

Profit and Loss Statement and Income Statement

It is critical to understand your financial reports and this plays into the success of any business. Morgan helps to clarify the difference between two key reports:

Profit and Loss (P&L) statement: The P&L statement gives you a snapshot of your business's income, expenses, and ultimately, your profit, over a specific period. It's like a financial microscope, zooming in on your cash flow and expense trends, which is crucial for managing your finances effectively.
Balance sheet: The balance sheet offers a broader view of your business's financial health over time. It's like a financial roadmap, showing your assets, liabilities, and equity. This report evolves with your business, providing a comprehensive picture of its growth and stability.

Regularly reviewing both reports is essential for staying on top of your financial game plan. Morgan recommends checking in at least quarterly to spot any emerging trends and make informed decisions.

Understanding Cash vs. Accrual

Understanding the distinction between cash and accrual accounting is a game-changer for anyone diving into the world of bookkeeping. These methods differ in recognizing income and expenses based on timing. With cash accounting, it's straightforward—the moment money enters or leaves your bank account, it's recorded. On the other hand, accrual accounting recognizes transactions when they occur, regardless of when the cash actually exchanges hands.

This discrepancy in timing can have significant implications, especially when it comes to tax season. For instance, imagine you invoice a client in December, but they don't pay until January. In accrual accounting, that income is recorded in December, while in cash accounting, it's counted in January. This seemingly small difference can impact your tax obligations and financial reporting.

Interior designers must grasp these nuances and stay informed even if they are delegating these tasks. Being aware of the details can prevent costly mistakes down the line. The goal is to empower yourself with the knowledge needed to make informed decisions and navigate the financial landscape with confidence.

Seeking Help from a Bookkeeper

The reluctance to seek bookkeeping help is a common hurdle for many when first getting started with your own interior design business. There's this prevailing notion that professional bookkeeping is a luxury reserved for established interior design businesses, leaving those new to the industry feeling overwhelmed and underprepared. But here's the thing—we've heard it all before. From messy spreadsheets to missed deadlines, the struggle is real, and it's more common than you think.

The truth is, sharing your financial woes with a stranger can feel like airing your dirty laundry. But let me reassure you, there's no judgment here. As Morgan points out, they have seen it all! Every stumble, every oversight— their goal is to help you pick up the pieces and set things right. The first step is realizing that everyone has to start somewhere.

It's crucial to recognize that investing in professional bookkeeping isn't just an expense—it's an investment in your business's future. By offloading the financial nitty-gritty, you free up valuable time and mental energy to focus on what truly matters—growing your business. And trust me, it's about more than just categorizing transactions and balancing the books. It's about streamlining processes, optimizing cash flow, and maximizing tax deductions.

So, if you've been putting off getting help with your bookkeeping, remember this—it's never too late to start. Don't wait until you've cleaned up the mess yourself. The sooner you bring in a professional, the sooner you can get back to doing what you do best—running your business. It's an investment worth making for your peace of mind and your bottom line.

Top 3 Bookkeeping Mistakes Interior Designers Make

1 - Using person-to-person payment apps like Venmo and Cash App for business transactions.

This is a practice that can quickly turn your financial records into a messy nightmare. Think about it—mixing personal and business funds in these apps violates their acceptable use policies right from the start. Plus, trying to decipher a string of emojis and vague transaction descriptions is hardly efficient or professional.

So what's the solution?

Opt for more streamlined payment methods like ACH transfers through design platforms or invoicing directly through QuickBooks. Sure, PayPal might offer a slightly better alternative, but even then, it's best to keep business transactions as clear and organized as possible. After all, when it comes to bookkeeping, clarity is key.

2 - Mixing your personal and business finances

This is a slippery slope that often starts innocently enough—using the company credit card for personal purchases or treating your business account like your personal piggy bank. But this practice can quickly spiral into a messy tangle of mixed finances, putting both your business and personal assets at risk. Separating your business and personal expenses isn't just a matter of convenience—it's a legal and financial necessity. When you form an LLC or S Corp, part of the deal is establishing a clear boundary between your personal and business finances. Mixing them up not only muddies the waters but can also expose you to legal liabilities if the dreaded audit ever comes knocking.

So, what's the solution? It's time to draw a firm line between your business and personal expenses. That means no more using the company credit card for your shopping sprees or dipping into the business account for personal purchases. Instead, set up a separate business credit card and checking account dedicated solely to your business expenses. This not only simplifies your bookkeeping but also provides a clear record of your business transactions, making tax time a breeze.

(And don't forget about taxes! Setting aside a portion of your income for taxes in a separate savings account is a smart move, especially if you're a quarterly or annual filer.)

3 - Failing to update your project management system in real time.

It is extremely important to keep your project management tools, whether it's Design Files, Houzz Pro, or Mydoma, meticulously up-to-date. While these platforms may automatically mark payments made through ACH or credit card, any payments made through other methods like checks, wires, or Venmo require manual recording.

Why is this so crucial? Without accurate and timely updates, your project's financial picture can quickly become murky. For example, if you receive a deposit but fail to record it in your project management system, it becomes challenging to track where that money came from and how it should be allocated. This can lead to discrepancies between your bank statements and your project records, making it difficult to assess your project's profitability accurately.

Moreover, managing purchasing and expenses adds another layer of complexity. When orders are placed, payments are made, and items are shipped, discrepancies can arise due to changes in pricing, shipping costs, or order quantities. It's essential to have a system in place to track these changes and update your project management system accordingly.

So, how do you tackle this challenge effectively? Morgan suggests setting up a dedicated email address for all receipts and order confirmations, ensuring that someone on your team is responsible for monitoring this inbox and updating the project management system accordingly. Additionally, it's crucial to differentiate between payments received for services and payments received for product purchases to maintain clarity in your financial records.

Remember, when it comes to bookkeeping, simplicity, and organization are your best friends.

Resources mentioned in this episode: