What could an upcoming recession mean for interior design businesses? The topic has been top of mind for many over the final months of 2022, and it’s looking more likely than ever that we will experience a recession in 2023, with economists predicting a 70% chance as of late December.

When facing economic uncertainty, there is no better person to speak with than a financial expert who is also thoroughly versed in the business of interior design with all its unique characteristics. That’s why we turned to Sherrell T. Martin, Chief Financial Solutions Officer of Nitram Financial Solutions, to get her advice on how to navigate a recession to keep your business afloat through choppy waters.

Here is what Sherrell had to say about bracing your interior design business for a recession:

Study your financials, especially the proforma report 

“Having a good understanding of your financial reports is key to knowing the current and future health of the business. One of the most important reports to use during a recession is a cash flow projection or proforma report. This report will help you understand how much money is coming in and going out of the business but more importantly how much runway you have before you run out of cash. Knowing and understanding this will help you see how far your cash will go for operating expenses, expenses you have to pay whether you make a sale or not.”

Have a financial model of your projected income vs. expenses

“I recommend having a projection at least six months out but ideally twelve to eighteen months. You can also create two additional versions - a worst-case and a best-case scenario changing the key numbers that can shift everything. This is to ensure that you are aware of any potential cash flow issues far enough in advance to be able to course-correct the direction the business is headed.”  

Have a cash cushion

“You want to aim for saving at least six months of operating expenses.”

Paying down debt vs. storing cash

“If you are in a great cash position, then you could attempt to pay down your debt so that you can save money on interest, especially if you have an adjustable or fluctuating rate. On the flip side, you can pay the minimum payment and save the extra cash so that you are covered when the market starts to turn. A great position is one where you have excess cash on hand such as in a savings account or other cash equivalent asset, that can be turned into cash quickly, and using this cash will not put your business at risk.” 

Be creative in finding ways to save money and generate income

“Being creative can take many forms and a recession is a time to think outside the box. We recommend all businesses do a cost audit every year to see where you can cut back spending. You can also try increasing marketing efforts by re-targeting to a specific audience, renegotiating contracts to ensure you are getting the best terms, and diversifying your portfolio to protect yourself from the risk of a big dip in income because it’s all coming from one source. These solutions are just a few of the things I have seen business owners do in order to stay afloat.”

Be prepared ahead of time

“As an interior design business, it is important to be prepared for a recession well ahead of time. In order to do that you need a solid accounting system in place, efficient accounting policies, processes and procedures and best practices as it relates to your financial management.  In order to do that you need a solid accounting system in place, efficient accounting policies, processes and procedures and best practices as it relates to your financial management. You have to be in control of your finances. If you haven’t already, create a clear and concise workflow around ordering merchandise and furnishing such as creating the purchase order at the time of ordering so that when the payment needs to be recorded, it's already there. Another best practice is to have a designated day to handle your accounting so that you can stay on top of everything and not fall behind. The more aware you are of how things are going the better you can prepare for what lies ahead.”

While facing a recession is not an ideal scenario for any small business, staying organized and making informed decisions will put you on a path to safety. Being diligent in your bookkeeping and project management is the advance preparation, studying your financials and proforma report on a regular basis is your forward looking guide, and strategically managing cash and debt are your tools to stay afloat. We owe a huge thanks to Sherrell for sharing her wisdom and expertise with us, as we’re committed to giving  our Design Manager blog readers everything they need to know about the business of interior design.