How to Understand the Cash Position of Your Business

How to Understand the Cash Position of Your Business


Ready for a little play-pretend meets pop quiz? Let’s say you wake up tomorrow and think, “to heck with this interior-design business”—you’re ready to cash out and move to France. Would you know how much of the money in your bank account is yours? If the answer is no, you’re far from alone, says Kimberly Merlitti, owner of KMM Consulting, a Washington, D.C.-based firm focused on helping luxury interior design, construction and architectural firms be as profitable as possible. She likes to ask new clients the France question, and it’s often the interior designers who have the toughest time answering. No surprise, considering that interior designers juggle unique accounting challenges like sales taxes and work-in-progress liabilities. It’s enough to scare off even the most math-minded business owner—which is why Ivy recently hosted a webinar where Merlitti walked us through how interior designers can figure out their cash position (or simply put, how much money is actually theirs to spend). If you aren’t able to watch right now, here’s a quick overview of what how you can calculate your own cash position—whether or not you’re dreaming of an impromptu move to Paris.  

A Cheat Sheet to Your Balance Sheet:

First, don’t be scared off by this and other accounting terms. Your balance sheet is just a financial track record for your business, from the day you started it until today—a record of money in, money out (plus money that’s moving in or out in the future).

Here are some key terms that’ll help you make sense of your balance sheet:

Liabilities: anything that takes money out of your business. It’s important to factor in both current and long-term liabilities whenever you calculate how much money is your own. Current liabilities would include credit card or loan payments you need to make each month, while a loan you don’t need to look at for six months would be a long-term liability.

Here are four types of liabilities interior designers should pay special attention to:

1. Sales tax, because you’re buying with a resale license. These incur at different times in different states, so it’s important to understand your current state law.

2. Credit-card balances, which you should always have enough cash to cover even if you don’t pay them off monthly.

3. Loans and lines of credit, either long- or short-term, for which you may need to pay monthly interest.

4. Vendor liabilities, also called “works in progress”—for example, if you make a custom sofa for $10,000 and put down a 50-percent deposit, you should have the remaining $5,000 set aside to pay the remainder at any time, even if it’s not due for six months.

Overhead costs: Also known as business/administrative expenses, these include payroll, rent and insurance—monthly expenses you must pay regardless of what projects you are working on. Merlitti recommends her clients always keep enough money in the bank to pay six months’ worth of overhead as a precaution.  

Capital expenditures: These are your “wishlist” business expenses—money you spend only when you have money to spare after deducting your overhead costs and liabilities. Capital expenditures might include doing advertising/marketing or a showhouse, or buying new furniture or computers.

Your Once-Weekly Calculation:

Now it’s number-crunching time: Choose an hour each week—ideally on the same day/time—to sit down and deduct your liabilities and overhead costs from your bank balance. Use this sample spreadsheet Merlitti made up, plugging your own numbers in next to the examples, and have your bookkeeper or CPA help the first time around, if needed. A note about loans/lines of credit: If the principal balance is due within six months, deduct the full amount. Otherwise, just deduct the interest for this month.

A few initial tips:

+ Calculating your vendor liabilities can be a sticky spot. If you’re using Ivy, an open purchase-order report (in the Reports section) would be a good way to see what you still owe. If the number seems crazy-high, make sure your database is up-to-date (i.e. if you proposed items that a client decided not to order, be sure to make those inactive or pull them out).

+ To figure out your sales-tax liability, you can again use the Reports section with in Ivy, use Quickbooks, or ask your CPA.

+ For overhead costs, divide your annual numbers by twelve to determine your “monthly nut,” or how much you need in the bank each month to cover them.

Next, add your accounts receivable: This is money you have coming down the pipeline—money owed to you by clients that you have not yet received. You should monitor this balance at least twice a month.

Once you add your accounts receivable amount, the number you see represents how much money is actually yours. While this is simply a snapshot in time, since the numbers are constantly in flux, doing this weekly will give you a good sense of how much money is yours to spend—instead of the false comfort of seeing $200,000 in the bank and thinking you’re flush with cash.

Don’t panic if your number is negative! “It doesn’t mean you’re going out of business—a negative number is often why clients hire me,” Merlitti says says. Now that you’re seeing the numbers clearly, you can find ways to adjust them. If needed, speak with an accountant to help you come up with a plan.

And don’t forget about income tax. This is a personal expense to always have on your radar when thinking about how much money you have free to spend. “You’re in an industry that requires sitting down with someone who really understands your business and figuring out what you will need to pay in six months, three months or next month,” Merlitti notes.

Still hesitant to dive into that balance sheet? Don’t worry, this webinar walks you through it step-by-step. “Understanding all of this may seem difficult at first, but you need to go through the exercise of doing it to know how much money in your bank account is yours,” Merlitti says.

Ivy is the leading business management platform and community helping home professionals streamline their businesses by providing the technology, resources, and support they need to thrive. To learn more about Ivy, schedule a demo with an Ivy Guru who can show you how designers use Ivy to streamline their workflow and make more time for what they love, design.