How an Interior Design Studio Stopped Treating Client Deposits Like Revenue
Sam's List Editorial | 2026-07-30
How an Interior Design Studio Stopped Treating Client Deposits Like Revenue This is an illustrative scenario, representative of the kind of cleanup work described below. Details are anonymized, figures are for illustration, and outcomes vary by situation. Client deposits are not revenue. They are somebody else's money that happens to be sitting in your bank account. Every project-based service business learns this eventually, and most of them learn it the expensive way: a great-looking spring, a hiring decision made off that spring, and then a summer where the work has to get delivered on money that was already spent. This representative case study follows an eight-person interior design studio that had exactly that year, and what changed when the books finally separated the two kinds of cash. The Situation The studio ran five to seven concurrent residential projects with fees between forty and three hundred thousand dollars. Standard practice was a 50 percent retainer at signing, progress billings at defined milestones, and separate client-funded purchasing for furniture, fixtures and materials, which the studio bought on its own card and rebilled with a markup. The books recorded all of it as revenue on receipt. Retainers hit an income account. Client-funded furniture purchases hit revenue on the rebill and cost of sales on the purchase. There was no project-level reporting. The March P&L showed a record quarter and roughly a 41 percent gross margin. The owner, reasonably, hired a junior designer and signed a larger studio lease. By August the bank balance had dropped by more than half while the P&L still looked fine, and nobody could explain the gap. Why Client Deposits Are Not Revenue, and Why the Numbers Lied Two distinct distortions were stacked on vetted of each other. The first is timing. A 50 percent retainer collected in February for work delivered from February through September showed up entirely as February revenue. Revenue was being recognized when cash arrived rather than as the studio earned it, which front-loads every project and makes the first month of a new engagement look like a vetted month the business ever had. The corresponding cost, which is nine months of designer time, landed later. The second is gross-up. Running client-funded purchasing through revenue and cost of sales inflated both sides of the P&L. A quarter with eight hundred thousand dollars of furniture procurement looked like a business with much more revenue than it had, at a much lower true margin, because the design fee that the studio actually earns was buried...
