Tips for Managing Cash Flow in a Design Business
Running a design business can be incredibly rewarding, but it also comes with its unique set of challenges, especially when it comes to managing cash flow. In today's economic climate, where uncertainty seems to be the only constant, keeping your finances in check is more important than ever. Here are some relaxed yet practical tips to help you navigate the cash flow waters smoothly.
Discipline is of paramount importance to a successful business. Discipline is not an inherited trait; it’s learned. Most designers are highly disciplined and many have had previous careers that shaped their habits.
I have been practicing discipline with cash flow since the early days of my business. With the ebbs and flows of building your client list, and the lean times with economic uncertainty, you have to create both a system and have reserves. Cash flow is what determines your success or failure.
Below are some tried and true ways in which you can ensure that you will keep the lights on, even in uncertain economic situations.
1. Keep Track of Everything
First things first, you need to know where your money is going. Set up a system to track your income and expenses. This doesn’t have to be super fancy—a simple spreadsheet can do the trick. Just make sure you’re consistently updating it.
However, if you really want to set yourself up to take the business to the next level, tools like Design Manager, or Studio Designer can be incredibly helpful too, and they automate a lot of the process, in addition to being “Design-centric.” These tools were made specifically for our industry and I highly recommend you doing a trial of one of these programs with one project to see if it will be a good fit for you.
Quickbooks and Freshbooks are good business accounting programs as well, but do not have that all-encompassing aspect that the design programs offer.
2. Invoice Promptly and Follow Up
Don’t be shy about sending invoices as soon as a project wraps up. The sooner you send them, the sooner you get paid. If a client is late, a friendly reminder can go a long way. Sometimes, clients simply forget or need a little nudge. It’s all part of the game. I recommend a monthly invoicing system, which cuts down on generating paper/virtual invoices and allows the client to have monthly expectations.
3. Manage Your Expenses Wisely
It’s easy to get caught up in buying the latest gadgets or fancy software but ask yourself if it’s necessary right now. Focus on essentials that directly impact your bottom line, work quality and efficiency. Saving on non-essentials can give you more breathing room in your budget.
4. Build a Cushion
Aim to have a buffer of at least three to six months of operating expenses. This might sound like a lot, but it can be a lifesaver during slow periods. Having this cushion gives you peace of mind and the ability to focus on your creative work without constantly worrying about money.
5. Diversify Your Income Streams
Relying on a single client or type of project can be risky. Think about diversifying your income streams. This could mean offering different types of design services, becoming an influencer, selling digital products like templates or courses, or even exploring passive income opportunities such as licensing your designs or products.
6. Negotiate Payment Terms
When starting a new project, discuss payment terms that work for you and include them in your Letter of Agreement so you can manage your clients’ expectations more effectively. I always get the Creative Services Fee upfront and procurement fees are due in full when a purchase is made, and not at delivery. Some may wish to take a deposit, set up milestone payments, or shortening the payment window. Clear communication about your terms can help ensure you’re not left waiting too long for your money.
7. Build Strong Client Relationships
Happy clients are more likely to pay on time and return for future projects. Invest time in building and maintaining strong relationships with your clients. This can also lead to referrals, which are invaluable for growing your business.
8. Hire a Bookkeeper and or a Fractional CFO
It is really important to pay your bills on time and report your business taxes. You can set reminders in your calender or project management apps/tools, but having a professional that takes care of this, manages your books and gets your sales tax reports ready is truly important. First, it frees you from doing something that is not in your brilliance zone. You are creatives, not accountants!
You can hire bookkeepers for a set amount of hours per week and they can also work virtually. I have had a virtual bookkeeper for twelve years and have never looked back.
My bookkeeper generates a Profit and Loss Statement (P&L) for me quarterly and yearly. It is important to take stock of your cash and accrual gross and net income, which I share with the accountant and together, they provide me with important information to generate tax estimates, and work on financial goal setting.
9. Checks and balances on inventory and pricing
Many design firms carry inventory on goods. Understanding the COG (cost of goods) is so important in this changing economy. It is up to you and your team to verify the cost, understand whether it’s coming or going, rising or falling, and why. You should also try to work with vendors on better margins for repeat and loyal clients. A reliable vendor is worth their weight in gold. They are one of your trusted partners, so treat them as a part of your team. Keep your inventory tight, not so low that everything runs out, but not so heavy that it gets used up faster.
10. Stay Adaptable
The economy can be unpredictable, and staying adaptable is key. Be open to adjusting your strategies and exploring new opportunities as they arise. Flexibility can help you navigate through tough times and come out stronger on the other side.
Remember, managing cash flow is an ongoing process, not a one-time task. By staying on top of your finances and being proactive, you can keep your design business thriving even in uncertain economic times.