With the fall of Lehman, the Merrill Lynch acquisition, and the AIG fiasco, many of us could be left scratching our heads and wondering, “What could possibly protect my business if these giants can’t even hold it together?”

I watch CNBC every morning. In the last few weeks, there has been a recurring theme that these giants toppled because of their lack of risk management strategies. Maybe it was greed, maybe it was lack of foresight, but these companies did not manage their risks and now their employees and their shareholders are feeling the brunt. Mr. Lehman, who built the company 158 years ago, is also rolling over in his grave. The question is, “How can we, as interior design firms, manage our risks in a time when the state of the economy is a day to day prognosis?”

Client deposits. I have spoken with far too many designers that only request a 50% deposit to place an order for goods. Let’s take the following example:

ABC Design Firm orders $100,000 worth of goods for Mr. and Mrs. Smith

ABC Design Firm marks up goods 30%

Total sales = $130,000

However, ABC Design also only requests a 50% deposit to place the order, even though many of ABC’s vendors require 100% up front.

Deposit that ABC receives = $65,000

That means that ABC is $35,000 in the hole on these orders. $35,000!?!? Not only is this bad for cash flow, it could potentially ruin ABC’s business in one fell swoop.

What if something happened to Mr. or Mrs. Smith? What if one of them lost his or her job and there was no longer money to pay for these orders? Mr. and Mrs. Smith may be very nice and honest people, but if the money is not there, the interior designer is going to be one of the last in line.  If Mr. and Mrs. Smith fail to pay ABC the other 50%, ABC will be forced to cover $35,000 of the manufacturers’ bills, not to mention freight charges, and will have lost $30,000 in gross profit.

COVER YOUR COSTS IN YOUR DEPOSIT. Better yet, request 100% deposit to order. At least if ABC Design Firm charged a 75% deposit ($101,250) on this order, their $100,000 cost of goods sold would be completely covered. If something happens, they will only be out their profit and some freight. (I say “only” but I know that hurts too).

Risk management is not just an important business practice for the giants. It is crucial to small businesses and especially to interior design firms.

Author: Alexandra Gibson

Alexandra is the CEO of Gibson Design Management and Managing Partner of interior design firm, Gibson Design Group. When she's not busy trying to build an empire, you can find Alexandra riding a horse, giving back to the community, playing with her Scottie, McCord, or drinking a martini (preferably not all four at once).

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Tags: Client Deposits, Finance, Risk Management, Running an Interior Design Firm