Guide to running a Practice
Pt 2: Cashflow Forecasting and Studio management
Once you have decided to start your own design practice you have taken the first bold step down a road that can lead you to fame and fortune. However, without good management this first bold step can be over a precipice to disaster. In writing this series I assume (maybe wrongly) that you have your area of expertise identified, and that you have a client or two.
You must register your business as a limited company and take out Professional Indemnity Insurance to protect yourself from liability if things go wrong. If you are not a limited company, then you can be personally held responsible for the debts of your company. In the 1980’s when interest rates were raised to 16% the commercial mortgage on our office rose to 21% (5% over base)! It coincided with the hospitality market nose-diving after Sadam Hussein invaded Kuwait. London hotel occupancy went to 17%! Work dried up, practices went broke left right and centre.
An hotel chain cancelled a project with my practice and refused to pay us £107,000 due in fees. I found myself selling house, shares, cashing in pensions, cars etc. to pay the business debts and redundancy terms to 20 designers. Our accountant had advised us to remain just a plain partnership – bad financial advice. Trading simply as a partnership not a limited company left us personally liable for all debts.We paid everyone, maybe stupid but too proud to go bankrupt, which we avoided but which could have saved something. Don’t get caught in the same way, get limited – your liability (unless you behave criminally or with intent to deceive) is the share capital, usually very limited. Needless to say when we carried on trading as a new business it was as a limited company and you should make sure you do the same.
When you start in business you need to be able to finance the first few weeks, or maybe even months. Most people line up a Client before they go on their own. *Be careful – your contract of employment with an employer may include a non-compete clause, and clauses on copyright which mean you can neither take a client from your employers’ business nor help yourself to unlicensed copies of your employers’ software without risk of prosecution and possible imprisonment. *
When proposing a fee to the Client you should understand several things: –
- You may not be able to resolve issues between you, or come up with a satisfactory solution to problems, so you can get fired (no employment protection here). So, your fee proposal should make sure a schedule of payments is made so that it covers cover work to date
- It is rare for Clients to make immediate payment, and time between invoice and money in the bank can be lengthy regardelss of your terms – rememebr the Golden Rule – he who has the gold rules
- VAT etc. must be paid on schedule. HMRC takes the view that tax you collect on their behalf is their money and you cannot hang on to it without risking prosecution. I’m sure the same can be said of state taxes in the USA or elsewhere
- Payment of fees on an agreed monthly basis smooths out cashflow for both you and your client
So, run a tight financial ship, be cautious and do not give in to temptation when the big cheques come in! Above all be aware that cashflow like a river can go rise and fall depending on floods or droughts of work
Look at fee income predictions in harness with expenditure to predict that status of your bank account. I used Microsoft’s Excel as my financial control package but there are plenty of alternative bespoke accounting packages available, including a pencil and lined book if you prefer the wood/graphite interface. You should of course do a monthly reconciliation of the bank account against your cashflow forecast (yeah, like you are going to have time for that – not!). Without a formal reconciliation, just a check at the end of the month of the rough figures should tell you whether all is under control or not. Don’t be afraid to ask your bank for help in setting this up, they should give you start up advice for free. Using an accountant is expensive and shouldn’t be necessary until turnover rises
Most find the one flexible element in running a business is their own salary, but remember when struggling that you are in this to make money, so your income needs to be a focus. Hold back if you are struggling but don’t forget your fixed expenses such as food, rent etc. demand an income. Don’t make the mistake of giving yourself the salary you deserve, the car you have always wanted, before you are generating the cashflow surpluses you need to support these desires. Running you own business can give you a satisfactory level of control of your personal work life balance but can also mean jam always comes tomorrow…
Balance your fee/invoicing against the cashflow needs. Sometimes it can be advantageous to be slow in invoicing in order to level out the income. Do not be fooled by the peaks, always look for the troughs. Your cashflow forecasting can determine when you need to actively market your services before you run out of work. More companies go bust when they take on marketing just as they realise they are in trouble, too late for the marketing to turn their ship around. Your cashflow forecasting is a way of anticipating events enabling preventative action to be taken.. Also don’t ignore what the politicians are up to – they cause recessions.
You will find using this system the assistance you need from an expensive financial or marketing guru is limited. It can be advisable to take a minimum income and the remainder in dividends from the declared profit at year end. You need to submit accounts to the State annually. The advantage of taking a dividend is that it is paid without deduction of PAYE and at a fixed tax rate that is lower than PAYE, at least in the UK.Don’t forget that there are tax advantages inpensions too.