Accounting for Design Firms: A Closer Look at its Unique Challenges

Accounting
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Fincent Team

37% of small businesses outsource their finance and accounting tasks, and understandably so. Design firm accounting basics is all numbers - something innately opposed to someone with a creative mind who runs a business in design.

While accounting processes remain largely the same, there is a marked difference between the nature of data that exists in a design firm as compared to, say, a consulting firm. Resultantly, design firm accounting has come to be its own separate niche.

So, which challenges should you anticipate when accounting for your design firm, and how do you go about them? In this blog, read about how accounting differs in a creative business from a non-creative one.

What Makes Design Firm Accounting Challenges Different?

As an interior design firm, your business is different, and so are its accounting needs. For a consistent, transparent system of dealing with financials in your firm, you should know certain areas where numbers are recorded differently.

To start with, there is no singular fee that a client reimburses to your design firm for its services. Rather, there exist different kinds of compensations that your firm raises invoices for. As a result, it often becomes confusing to classify and record them in financials.

Some of these fees are:

  • The design or consultancy fee
  • Billing nature, which may be time-based or project-based
  • Commissions
  • Project management fee, in certain special cases
  • Sourcing and procuring materials and goods for an interiors project - essentially, a "disbursement arrangement" where a client issues a budget and the responsibility to source all the material from a supplier lies on the designer. Here, the designer acts as the middleman between the client and the supplier, taking care of all procurement and payment processes.

Accounting for such a wide range of incomes takes a little more than basic accounting knowledge. In addition, there are tax considerations to take into account.

How to Handle Design Firm Taxes

The universe of taxes can be compared to a cobweb - a definite structure does exist, but one has to know which threads connect where.

A single method that works for all design firms does not exist. Guide to Accounting for a design firm is an improvisational and continually evolving process. The nature of deliverables that your interior design firm offers to its clients is the major taxable product on the table.

Whether you provide only designs or also deal in curated artworks, whether or not you charge a commission fee, etc., are some highlights where your business taxes need to be worked out accurately.

It is important to separate incomes based on services and those based on goods sold. Here is the tax breakdown.

Design Firms Businesses and Sales Tax

Interior design firms have one of the most complicated sales tax cobwebs of all. This can be attributed to this industry's nature: designing creative and stunning spaces often involves procuring material, furnishings, and artwork from across the country - sometimes even internationally.

The taxes applicable on procurements made from each vendor of different states are different. Your vendor must comply with the sales tax laws of the state they are registered in - and your design firm in its own.

In addition, there are tax exemptions applicable in certain special cases, which you ought to keep in mind to cash in on the benefits. You also need to check the sales tax nexus requirement if your firm has multiple branches in different states.

In the states where a firm doesn't owe any sales tax, there is a possibility of incurring a "use tax" that is equal in value. It is best to have an accountant or professional bookkeeping service like Fincent look into it.

Regardless, the safest way to deal with sales tax for design companies is to always check and collect (or pay).

Different Expense Types

You can place most of the expenses incurred by your design firm under five distinct heads:

1. Material and Supplies

The cost of material and supplies (construction stone, cement, wood, etc.) required to complete an interiors project goes under this head. Be sure to save all the receipts.

2. Shipping/ Delivery/ Installation

The charges that your firm incurs in procuring materials and furnishings for a project, the cost of installing artwork and furniture, and other such expenses can be classified under this head.

3. Labor Costs

No interior project can be accomplished without the help of on-site handymen and professionals. The cost of these professionals is classified under this head.

4. Reimbursable Costs

The expenses shouldered by your firm, which are later reimbursed by the client, are meant to be put under this head.

5. Uncategorized Expenses

Costs like parking fees, fuel charged to clients for site visits, and other such expenses will fall under this head.

Apart from these heads, you can take the help of an accountant to determine your firm's cost of goods sold (COGS) value and better calculate gross margins.

Incurring and Deferring Expenses and Revenue

Since interior design isn't a straight-up payments business, there will often be expenses and revenue that would need to be booked before they are incurred or utilized.

"Deferring" in accounting refers to a record of an expense or earning that hasn't actually materialized yet but has been accounted for.

Let's assume that a client pays your design firm 50% in advance for its services but hasn't yet cleared the dues for procuring the material. All these figures would go in deferred revenue and expenses, respectively.

This is because the firm is yet to design the interior for a client. The payment is in advance for a service to be delivered in the future. Similarly, the firm has procured material for the client and paid for it proactively but hasn't been compensated for those expenses.

It would make sense to spread these values out over the term of the contract between the firm and the client to achieve cohesiveness in the firm's books.

If you are having your own design firm then here is something for you, The best accounting for interior designers to keep them updated.

Revenue and Cost Recognition

Truth be told, recognizing costs and revenue in the design industry is a tricky challenge, especially since the nature of work is highly dynamic, unlike static products-based transactions.

Payment modes - such as billing the client by time, project, or in an itemized manner - can change how your firm's revenues are recognized. Doing this in lump sums or spreading it out evenly across the term of the contract can weaken your books.

In order to ensure strong finances - not just in practice but on paper as well - it is important to achieve a pattern in how and when your firm recognizes expenses and revenues.

The same goes for costs. Showing a massive expense in one quarter that doesn't sit well with the revenue during that period can mess up a firm's statements.

In Closing

These challenges in accounting for a design firm might make the process a little complicated, but with a little help, you and your company can enjoy smooth sailing.

Here is a accounting software for interior designers which keeps you updated with all your basic guidance.

A professional bookkeeping service like Fincent can analyze patterns, maintain your books, prepare reports, and more. Find out how we can help you plan your business finances well and focus on growth and creativity.

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