Well it’s almost April 15th, time for us to pay ‘homage’ to the IRS (Infernal Revenue Service) and give them their share of our profits. The trouble is that many Designers in fact pay too much in Income Tax, due to poor business planning, poor financial planning and not having a close relationship with a CPA or a knowledgeable Financial Advisor. I don’t care if you operate a small ‘one person’ design firm out of your home, or you have a well-formed Design firm with employees and significant revenue. It is imperative that you follow ALL of the following steps on a monthly basis:
Keep a record. Keep an accurate set of books (preferably in QuickBooks Pro) on the “Accrual basis” of accounting on a monthly basis. (The Accrual method of accounting is the most accurate, even though you might choose the Cash method to pay your taxes)
Hire someone to keep a record. Since I know that you will more than likely NOT do number 1 yourself, you MUST find and hire a competent, honest, full-charge bookkeeper that will come in and keep the books up to date. Depending on the size of your business, this should take between 8-32 hours a month (one day a week, to once a month). Ask fellow Designers or members of the AIGA for a referral.
Always know your P&L and CF. Each month you print out and analyze the Profit and Loss Statement, as well as the Cash Flow Statement (since Profit and Loss does not pay the bills, Cash Flow does). In the event that you are not skilled at reading these statements, you might want to solicit the assistance of your CPA, Financial Advisor to help you learn how to do this.
Project your Cash Flow. Prepare (and QuickBooks does this automatically for you) a Cash Flow projection for at least 30 days ahead (preferably 60-90 days), so that you know how much Cash will flow out of the business, and if you have the current jobs and Accounts Receivable (work already billed awaiting payment) to fund those cash needs.
You absolutely MUST know what your break-even point is on a monthly basis. The Break-even Point is easily calculated. You take your Total Fixed Overhead (fixed costs are those that do NOT vary directly with the creation of Income) and divide this by the Gross Profit Margin. (The Gross Profit margin is simply your Variable Costs, or those costs that change with the production of income such as Sales Tax, Supplies, Printing etc., divided by Total Gross Revenue. For example:
Total Fixed Overhead is $8,400 a month (just an example)
Your Variable Costs, based on prior months analyzed, are approximately 30% of Total Design Revenue (again your number must be calculated).
Therefore your Gross Profit Margin is 70% (100% - 30% variable costs)
The Break-even point is then simply $8,400 divided by 70% (or .70) and is therefore $12,000 per month.
Work towards your Break-Even with a good sales strategy. Once you know your Break-Even point, you know exactly how much you need to generate in Design Revenue to pay your bills. With this information in hand, you now have your SALES GOALS set. Stop forecasting revenue, simply examine your costs, find the Break-Even and you know how much you need to pay the bills.
Meet with your people. You must meet with your CPA, Financial Advisor at least three times a year.
You should then meet sometime in July-August to see your Net Profit, and to ensure that you are making the necessary quarterly tax pre-payments
The next meeting should be in early December, to take a final look at the Net Profit and try to take advantage of tax planning tips and procedures. This is a very important step in managing your Income taxes.
Plan for the future. Make a payment into an IRA, Roth IRA, SEP, 401(k) or other tax deferred plan. If you are not putting away at least $3,000 a year, you are wasting a precious opportunity to build a significant retirement program for yourself.
No matter what stage your business finds itself in, following the steps outlined above will ensure that you are on the correct path to managing your business into a profitable state. Focusing on these steps in the early days is the key to growing and building a successful Design firm.
Remember, “WE NEVER PLAN TO FAIL, WE JUST FAIL TO PLAN”.
Bookmark/Search this post with:
Errol Gerson has been providing Strategic Management and Financial Consulting for over 35 years. View Full Bio
Post new comment