6.5 Opening Your Own Studio

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Define: Gross Billing

This refers to the total amount paid to the firm for merchandise, services, and taxes. In other words, it’s what the client pays.

Define: Gross Profit

This refers to the gross billing minus the direct costs to the firm for the merchandise, services, and taxes.

Define: Net Profit

In our example, the gross profit of $60,000 does not take into account the overhead costs of the firm.

What are three arrangements as an associate designer?

1) The designer will give you half the profits from this job and any other jobs you bring to the firm

2) s you gain experience and become secure in handling your own jobs, the designer might direct potential jobs to you in addition to the jobs you bring in yourself. With these jobs, your compensation will usually be less than half. Once you have established yourself as a valued associate for the designer, you might suggest a 50-50 split on all work you do.

3) Arrange to be paid as a percentage of "gross billing" . Still have access to designer's business resources (stationary, office space, lawyers etc.) Fair compensation for both designer and you as an associate

What is a sole proprietorship?

Essentially you are the business owner to make all of the decisions etc. In a sole proprietorship, you are responsible for all debts and liabilities of the business without limits.

What is a partnership? What are three different types of partnerships?

You and one other designer go into business together and share the liabilities, responsibilities and decision making.
1) General Partnership
2) Limited Liability Partnership (LLP)
3) Limited Liability Company (LLC)

What is a general partnership?

In a partnership, each partner is liable for all the debts and liabilities of the business.

What is a Limited Liability Partnership (LLP)

This type of arrangement works well when one person or group of people want to put up money for investment, but don’t want to be saddled with the responsibilities and liabilities of a general partnership. Investor is protected from general role is responsible for liabilities.

What is a Limited Liability Company (LLC)?

Similar to an LLP, a Limited Liability Company provides a company with some characteristics of a partnership, and some characteristics of a corporationUnlike an LLP, an LLC can be created by one person.
Members of an LLC are taxed as in a partnership, which is an advantage because earnings are only taxed once. Assets in an LLC are also separate from a member’s assets, although when a member of an LLC leaves the company, the organization is usually dissolved.

What are 10 things a business plan outlines?

Purposes and objectives
Market analysis
Competition
Laws and government relationships
Product or service to be offered
Growth strategy
Marketing strategy
Financing
Operations
Risk analysis

What are the four key points to a business plan?

1) Description of the business
2) Marketing
3) Finances
4) Management

Tip for determining startup costs?

Take what you imagine it would cost to start up your business and double that estimate.

What are two typical forms of payment to the vendor that take place for merchandise and define them?

1) Pro-forma: vendor expects you to pay full amount of merchandise at time of order placement
2) Open account: Vendor will only charge you 50% (or whatever the % may be) and charge the rest at delivery.

What are two major files you should have?

1) Client files including a sub file for Pending, Work in Progress, and Completed
2) BookKeeper file for accounting related paperwork

What is the Worksheet form used for?

List all the details of what you want to get and how much each part of the job will cost you. This form is for internal use or your eyes only. The objective of the Worksheet is to use it to list every item that goes into a single order for merchandise or service. You will use it to calculate your cost for each of these items, and your client’s cost.
**you need a separate Worksheet for each payment that will be required of the client
**If you are ordering an item from a single supplier who handles the entire job, then you will only need one Worksheet.

What is the purpose of the invoice form?

Before you order any item or service, record the details of the job and the costs on this form. You will then have the client return a signed copy of the Estimate/Invoice along with a deposit of 50% of the total cost, as indicated on the form.

What is the purchase order form for?

Once the client has approved the Estimate/Invoice form and given you the deposit, you send the vendor or contractor a Purchase Order in which you describe the merchandise or service in detail, and indicate the agreed-upon price that the vendor will be charging you and any other appropriate terms and conditions.

What is the statement form used for?

Whenever additional money is due from the client, for example, when the item is ready for delivery and the final 50% is expected, you bill the client by sending a Statement for the amount due.

What is the credit memo form for?

There will be times when you will have to either give money back to the client or reduce the amount that the client is expected to pay. You send out a Credit Memo for this amount.

How do you use the color coding for Estimate/Invoice forms?

Blue Copy: Bookkeeper File

White Copy #1: Kept by client

White Copy #2: Filed in the Approved Estimate/Invoice file after signed copy is returned by client

Green Copy: Clipped to Worksheet in Pending File

Besides including the client's name, PO number, client's address, item, description, and unit and total price, what are some other things to considering including on a purchase order form?

1) Write deposit amount included
2) Estimated delivery date
3) Where it should be delivered to
4) What room it should be delivered to (if doing a whole house)
5) A signature from you or your team.

What is a statement for?

To bill the clients the remaining part of what's due for a service or product including taxes and delivery charges.

What is a credit memo used for?

When a credit is due back to the client for a usually small dissatisfaction, ie small damage to sofa leg. Vendor is also passed on the credit memo to issue the amount back to the designer/client.

What are the five major folders you should have to store paperwork?

1) Client file—one for each client
2) Bookkeeper file
3) Estimate/Invoice folder
4) Purchase Order folder
5) Credit Memo folder

A client file should have these subfolders?

1) Pending
2) Approved Estimates/Invoices
3) Work In Progress
4) Completed Work
5) Correspondence

What is a petty cash fund?

It's a small amount of money set aside for small expenditures that don't make sense to be paid for by check. Example: taxi fares, coffee, etc. Generally $200 is taken out of your business checking account and put into a petty cash box and when small amounts are needed, you take from this box while filling out a petty cash voucher so that you and your accountant can keep track of expenditures.

How do you easily determine your cash position?

Start with the money you have in your bank account and petty cash box. Add to this the money that is owed to you (accounts receivable). Finally, subtract the money that you owe to others (accounts payable).

What are the key points when charging and collecting sales tax for merchandise or service when working with a client?

50% of the sales tax should be included in the invoice to the client while the remaining will be included on the statement. HOWEVER, because you may have to owe the remaining 50% of the sales tax to the tax office before a product is delivered, you must use your operating capital to cover this cost until you get the remaining amount from the client.

Is sales tax charged on a service?

It depends. If the service is considered "maintenance" like wallpapering or painting then yes, but if it is a capital improvement (construction-can't be removed without damaging premises) then no sales tax is required in most communities.

How do you avoid sales tax for capital improvement?

in most states you simply have to inform the contractor that the job is not subject to sales tax because it is a capital improvement. The contractor is then responsible to pay it for the materials for the project (not labor) which will be included in the cost estimate for the job. This saves the client from paying sales tax on labor.

Does the client have to pay sales tax on the cost of your services?

The answer is again Yes and No.
YES: Sales tax is payable on commissions or markups earned by you. Let’s say you are working on a cost-plus-25% arrangement. You buy a chair that costs you $400 and sell it to the client for $500. The client must pay the sales tax on the Total Cost of $500.
NO: On the other hand, in most states no sales tax is payable for professional fees. For example, if you are working for a straight fee of $1,000 to do an entire job, then no sales tax is usually payable on that fee. Or if you are charging an hourly fee, then no sales tax is usually chargeable for the hourly fee that you bill.

Should you have insurance in place before starting your business?

YES. Consult your insurance broker to see what coverage is recommended. Here are some types of insurance to consider:
Workman's Compensation
Disability Benefits
Unemployment Insurance
Comprehensive General Liability Insurance
Automobile Insurance
Fire and Theft Insurance
Contents Coverage
Bailee Insurance
Bonding
Errors and Omission Insurance