Financial terms: Break even point
Do you know how much revenue is needed for you to start being profitable?
While we've previously discussed assets and liabilities in our ongoing series of financial terms for those in the fashion sector, the break-even point is the moment when total costs (expenses) and total revenue are equal ➡️ you're no longer operating at a loss and about to start operating at a profit.
It's not uncommon for businesses to be in debt when they start because they have to fund the initial costs, such as hiring employees, renting a space, and buying equipment, or production costs, such as creating the first collection, buying fabric, etc.
Generally, companies' break-even points should come between 6 months and 18 months. Here's a step-by-step guide to help you calculate it:
→ Identify your fixed costs (FC). These are the expenses that you have to pay no matter what, even if your shop is closed. Examples include rent, utilities, and salaries.
→ Figure out your gross margin on sales (%GM). This is the percentage of each sale that is left over after you’ve paid the direct costs of producing your goods. To calculate it, subtract the cost of goods sold (COGS) from your sales revenue and then divide by your sales revenue. Multiply by 100 to get the percentage.
→ Use the next simple formula to calculate your break-even point:
Rev * %GM = FC
Revenue (Rev) times your gross margin percentage (%GM) should equal your fixed costs (FC).
Graphically understood as:
A common mistake is to think that your revenue just needs to equal your fixed costs (Rev = FC). But remember, only a portion of your revenue (your gross margin) actually goes towards covering those fixed costs.
Keep an eye out for our next blog, which will discuss all the different expenses that someone in the fashion sector might incur.
Which month did your company reach the break-even point?
Financial terms: Expenses
Have you ever thought about which are the general expenses of your business/studio and how they are categorised? Keep reading to find out!
But first, let’s define expenses: any costs incurred by a company to generate revenue. In the fashion sector, there are operational expenses, expenses incurred for side projects, wages for employees, and G&A expenses.
Under operational expenses, you’ll consider the following:
COGS: This includes any direct costs associated with producing clothing items, including fabric, zippers, thread, patterns, labor to make the items, packaging materials, etc.
Shipping & Distribution: How much does it cost to receive your final items from manufacturers, and how much does it cost to ship them to customers?
Machinery & Equipment: Sewing machines, cutting tables, software, and computers are reasonable expenses for a fashion designer or someone in the fashion sector.
Regarding additional projects, like pop-ups or special collections, any expenses generated by these endeavors are paid by additional sources of revenue different than the main one and recorded separately during bookkeeping.
SG&A expenses are non-production, day-to-day costs. These include:
Marketing & Advertising: Any related to your website, social media accounts, or advertising in general.
Rent & Utilities: These are the monthly expenses related to having a shop!
Professional Services: Some of the most common professional services include an accountant and lawyer to ensure you do everything correctly. Also, make sure you have insurance to cover your butt!
Wages are divided into other expense categories. The category depends on the activity the employee does, e.g.: Anyone working in your shop, helping you with administrative tasks, have their salaries categorized under SG&A! While employees directly involved in production activities have their wages under operational expenses → COGS. This includes full-time or mini-job employees, contractors, etc.
We challenge you to review your expenses! Where can you reduce expenses for your company?
Revenue vs. Profit
In our ongoing series of financial terms for the fashion designer, we’re breaking down revenue and profit.
As a refresher:
Revenue ➡️ the amount of money generated by your business BEFORE expenses and taxes
Profit ➡️ the amount of money generated by your business AFTER expenses and taxes
Your profit is a more reliable indicator of how your business is doing! If you make 100,000 Euros in revenue and have 150,000 in expenses and taxes, your profit is -50,000 Euros. But if you make 60,000 Euros and your expenses and taxes are 30,000 Euros, you still have a profit of +30,000 Euros. It doesn’t matter how much your company makes – you ultimately want to look at your profit!
Here are some of the most typical categories in the fashion sector used in accounting for the inflow of money (a.k.a. making money!).
Retail sales: Selling your items in your store or on your website.
Wholesale sales: Selling your clothing items in bulk to another store or online retailer.
Workshops: Teaching others how to start their own clothing line or other aspects of the fashion industry.
Design and consulting: Helping others design clothing or consulting for other fashion businesses.
Extra shops: Opening other shops for your clothing will bring in additional revenue (but also calculate your expenses to ensure you’re making a profit).
Pop-ups: These one-off locations can generate a lot of revenue in a short amount of time.
Special projects: This revenue includes anything you don’t do in your day-to-day business ventures.
Loans: Taking out loans can inject cash into your business. Just be aware of the loan terms and interest rate, as you’ll need to repay the amount!
Grants: These are financial awards that usually don’t have to be repaid. You typically need to apply for grants, but if you win them, they will bring cash into your business.
Stay tuned for the next posting in this series all about…expenses!
Common income sources for fashion designers/retail stores
How to calculate profit out of revenue
Cash vs Accrual Accounting
Is your accounting method the reason you have a positive (or negative) cash flow?!
There are two accounting methods for businesses: cash and accrual. While cash accounting is much simpler and more accurate in representing real-time cash flow, accrual accounting includes unearned revenue and prepaid expenses and provides a more accurate picture of a business’s profitability.
The main difference between the two accounting methods is TIMING. Here’s how the two methods work:
Cash Accounting: revenue and expenses are recorded when cash is received or spent, regardless of whether goods or services have been provided.
Accrual Accounting: revenue is recorded after goods or services have been “earned” or delivered, and expenses are recorded once billed.
The accounting method you use affects how you interpret your cash flow and liquidity. For example, a customer orders and pays 2,000 Euros in January for clothing items. However, the item will be delivered in February.
Cash Accounting: The 2,000 Euros are recorded as income in January because that's when the money is received.
Accrual Accounting: The 2,000 Euros is recorded as income in February because that’s when the customer receives the items.
On the other hand, if your business receives a bill for 1,500 Euros in January but pays it in February, the accounting method used determines when it is recorded.
Cash Accounting: The 1,500 Euros is recorded as an expense in February because that’s when it’s paid.
Accrual Accounting: The 1,500 Euros is recorded as an expense in January because that’s when the bill is received.
At the end of the month, this results in:
Under cash accounting, your cash flow in January is +2,000 Euros (positive), and in February, it's -1,500 Euros (negative).
With accrual accounting, your cash flow in January is -1,500 Euros (negative), and in February, it is +2,000 Euros (positive).
Send us any questions about the two accounting methods, and we’ll try to clarify them for you!
Liquidity measures and Working Capital
Let’s figure out how your working capital and liquidity will influence your business's amount of money at the end of the month! 🤯
In our last two postings, we discussed assets and liabilities and the different types you can have as a business in the fashion sector. This posting will explain how the two work together to give you your working capital and ensure you have money at the end of the month!
Your working capital: the difference between a business’s assets and liabilities. It measures your company’s liquidity for its day-to-day operations.
Your liquidity: the ability (ease and speed) to convert assets into cash.
If you want to check the liquidity of your company and ensure you can meet the short-term financial obligations of your business, calculate using these three liquidity ratios:
Working Capital Ratio (a.k.a. Current Ratio)
Quick Ratio (a.k.a. Acid Test)
Cash Ratio
Check the pictures below to know how to calculate them!
The next posting will examine how different accounting methods can indicate differing levels of liquidity and cash flow for your business.
Financial terms: Liabilities
When was the last time you made a list of your LIABILITIES ❓
Liabilities are anything that your company owes someone else. While it’s great to have a lot of assets, it doesn’t mean anything if you end up having more liabilities. Keeping track of your liabilities is important for the financial health of your company and your cash flow, and ensuring you can pay back everything you owe!
In the third part of our series on financial terms for the fashion sector, we’re discussing common liabilities (outflows of cash) a business might have (which apply to all sectors):
Rent and Utilities: If you rent a studio or retail space, you pay a set amount each month plus any utilities associated with the space (electricity, water, WiFi, etc.).
Wages: If employees work at your studio or store, any of these wages fall under liabilities. Employee benefits also fall under this category.
Accounts Payable: Any money that you owe to vendors, businesses, or individuals. In the fashion sector, this usually includes raw materials, supplies, and other manufacturing expenses for inventory.
Loans or Credit: Any business loans or credit card debt owed by your company.
Taxes and/or Fees: The taxes your business pays and any potential legal or accounting fees.
Unearned Revenue: These are payments you have received from customers for inventory they will receive in the future. It is common for companies in the fashion sector to have when it comes to pre-ordering inventory.
The next posting in this series will focus on how assets and liabilities work together to form your working capital. 👀 You won’t want to miss it! Do you have a list of all your business’s liabilities? If not, your goal is to make a list (and bonus points if you add your assets to this list as well!).
Let us know when you complete this and how your assets compare to your liabilities!
Financial terms for the fashion designer: Assets
This is why you’ve probably got more money than you think…
Continuing our series on financial terms everyone in the fashion sector should know, we’re focusing on everyone’s favorite thing ➡️ Assets. Assets are anything of value owned by a business. When it comes to the fashion world, we’re breaking down all the assets your company might have (and why your business probably has more value than you think).
Here are some of the most common assets for a fashion brand:
Inventory: This includes any finished products and sample pieces (anything sold for money).
Raw Materials: Fabric, buttons, zippers, thread, buckles, and anything else used to make your inventory.
Equipment: Sewing machines, computers, software, and anything else needs to make the inventory (patterns, etc.).
Real Estate: If you own a studio or store, the property is an asset for your business.
Furniture and Fixtures: Anything inside your studio or store you bought is considered an asset. This includes tables, chairs, counters, dressing rooms, lighting, etc.
Accounts Receivable: Any money owed to you by customers is an asset!
Remember: you should also include intangible assets! These assets include your branding, trademarks, copyright, designs, social media, website, and anything else with value.
Stay tuned for the next part of the series, where we talk about everyone’s least favorite part of business ➡️ Liabilities.
Why is financial literacy for the fashion designer important?
We’ll explain all the important financial terms for fashion designers so you’ll actually understand what the heck we’re saying in our next email or conversation with you! When you don’t understand your numbers and the associated terms, making smart financial decisions for your business will be impossible.
We’re here to dispel the stigma so you can feel confident and in control of your business and finances.
Number one term you need to know: cash flow. If you don’t know how much cash is going in and out of your business, making informed short- and long-term business decisions will be impossible. It’s important to understand not only the concept of cash flow but also how to implement managing and tracking it in your business.
These are the most common struggles we hear from clients:
Not enough time to track cash flow
Not sure how to do it properly
Overwhelmed with finances in general
Need support to manage their cash flow
If there’s one thing you can do for your business to ensure its survival, it’s tracking the cash going in and out over a specific period. Ultimately, you’ll want the cash coming in to be more than the cash going out, which means your company earns more than it spends!
Tracking your cash flow also helps you anticipate cash shortages, financial troubles, and other potential issues before they occur. When you work with a financial or bookkeeping company (like us 😉), they can help you spot any discrepancies and figure out a plan going forward.
When forecasting your cash flow, here’s what to consider:
Sales projections: How much do you plan to earn in the near future? Several factors influence this number, including how much inventory you have, how much you produce or plan to produce, and how you price your items. Ultimately, you only have a finite number of items, so your sales projections will hit an upper limit. It’s important also to consider past performance and current trends.
Fixed costs: What monthly expenses do you have to pay and don’t change regardless of how much you sell? This amount is your fixed costs. They’re usually composed of your SG&A (Selling, General & Administrative Expenses), which include rent, marketing and advertising, salaries, storage fees, utilities, etc.
Variable costs: What expenses change depending on how much you sell? Your variable costs are directly related to your sale volume and fluctuate accordingly. Your COGS (Cost of Goods Sold) will be your most significant expense. As discussed in previous postings, these are all the direct costs of making your product! Depending on the time of year and cyclical trends, your variable expenses will be higher and lower. It’s important to track these differences for cash flow purposes!
What to do when your cash runs low? In this next part, we’ll discuss various financing options:
Equity (investors): If you don’t need the cash immediately, equity financing and finding investors might be the best option. While you won’t be required to pay this money back to investors, you will have to give up a percentage of your company and future earnings to an investor. On the positive side, this investor might bring new ideas, knowledge, and experiences to move the business in a positive direction and help it succeed. However, you will no longer have full control of your company and might lose a substantial amount of income if the company becomes very profitable in the long term.
Debt (Loans): If you need money quickly, debt financing might be your best bet. Securing a loan doesn’t take much time (provided you qualify for one!), and you retain full business ownership. However, taking on a loan could cause future cash flow problems when it comes to repaying the loan PLUS interest!
Stay tuned for the second part of our series on financial terms fashion designers should know!
Financial Management of multiple projects
Here's everything we wish you knew when starting a new project (in addition to your full-time business)!
These days, everyone is starting a side project – whether it's renting extra office space, pursuing another passion, or creating products or services different from their full-time business. It's a way to make some extra money $$$ while tapping into separate areas of expertise.
Here's what to consider when pursuing a side project and financial factors to keep separate from your main business:
Business synergies
How will your main business and project work together? Are there ways that the two can collaborate to increase each other's efficiency and profitability? For instance, if you're creating products that differ from your fashion collection, can you still sell those items in your store? Whether it's cross-promotional opportunities, shared resources, or joint marketing efforts, identify ways the two can work together and benefit each other.
Financial plan
This aspect isn't just for your full-time business—you should make a financial plan for all endeavors, even side projects! Much like we discussed in our series on planning a collection, ensure you establish a budget, forecasting, and cash flow schedule so you know what money is going in and out of your business. While side projects are fun (!), your main goal should be profitability.
Bank Accounts
Before making money from your side project, you should open a bank account separate from your main business. While the two might work together or collaborate, the finances should be kept separate for accurate bookkeeping. If needed, an internal transaction can occur between the two accounts. And a reminder: if you don't have separate business bank accounts from your personal accounts, do that now!
Bookkeeping and Financial Reporting
While you can continue using your existing bookkeeping system or software, you must financially distinguish your side project from your full-time business! This will make it easier for your accountant to differentiate between the two, and understand which income and expenses go with which entity. Remember: having a separate account (mentioned in part 1 of this series) will also make it easier for you and your accountant to track everything!
Cash Flow Management
Not having enough money is the number one reason why businesses – full-time and side hustles – fail. If you don't know how much is going in and out of your business, you can't plan accurately in the short and long term. Make sure you record all your income and expenses and create schedules, so you know when to expect payments or when payments are due. It's important to constantly update your numbers so you can plan and evaluate (and re-evaluate and re-evaluate again!) financial decisions for your side project.
Investment and Financing Decisions
We always advocate, "know your cash flow!" But if you don't have enough cash to cover your expenses, devise a plan beforehand. What are the financial options in this scenario? Should you bring on a partner or investor or try to get a loan? It's so important to plan for potential scenarios before they occur. Work directly with your accounting professional (like us!) to manage your financial decisions and cash flow for your full-time business and side project.
Taxation
Everyone's favorite part of doing business! While your full-time business and side project have their own tax obligations, the main business will pay taxes in bulk. It's still important that taxes are tracked separately for both businesses. Additionally, there should be an internal transaction from the side project bank account to the full-time business bank account for their portion of the tax obligation. This will help track each entity's tax obligation and make bookkeeping cleaner and more manageable!
Profitability Analysis
The most important part of starting a side project is ensuring it's profitable and not just draining time, money, and resources from your full-time business. You'll want to consider each entity separately and then aggregate everything together (especially if they are working or collaborating together!). While the main business will pay the SG&A expenses, manually attribute the costs proportionally to the main business and side project, depending on how much they each use.
If you're ready to start a side project for your main business but still need financial guidance, drop a comment below or reach out to us at info@yotamperets.com.
Liquidity management
If you don’t know how much money is flowing in and out of your fashion studio (or any business!), it’s impossible to make informed short-term and long-term decisions. 💰
While we discussed factors influencing liquidity management in previous posts, our next series will focus on the specific components to ensure enough cash is available to pay all financial obligations!
Here are the factors to consider:
Cash flow forecasting: This is essential for predicting how much money will flow into your company over a specific period and helping you anticipate cash shortages or other financial troubles before they occur. Ultimately, you’ll want the cash inflows more than the cash outflows, which means your company earns more than it spends!
You should take several factors into account when forecasting your cash flow, including:
Sales projections: how much inventory you have, how much you produce, and your pricing
Fixed costs: your SG&A (Selling, General & Administrative Expenses), such as rent, salaries, and storage fees.
Variable costs: your COGS (as discussed in previous postings!), marketing, etc. Observing cyclical trends can help you better predict when your variable expenses will be higher or lower.
Working capital and inventory management: Your working capital is the difference between your current assets and current liabilities. To optimize your working capital, it’s essential to understand your fashion studio’s cash conversion cycle (CCC). This ultimately indicates how long it takes to turn your company’s inventory (an asset) into cash.
The shorter the CCC, the better! Too much inventory costs businesses money and reduces cash flow. Remember: cash inflow usually doesn’t align with cash outflow. Cash flow forecasting (step 1!) can help you save in advance to cover expenses, so you don’t face liquidity management issues.
Accounts Receivable & Accounts Payable Management: It’s essential to track these two figures to see how much money you owe and still owe.
Accounts Receivable: the amount of money your customers owe you (including any outstanding invoices)
Accounts Payable: the amount of money you owe to others (including any outstanding bills).
Unfortunately, the outflow and inflow of cash will not necessarily match up, which could affect your overall liquidity. Invoices typically have net payment terms. If the invoices you send out are net 90 days, but the invoices you receive are net 30 days, there will be a 60-day difference in when you have to pay bills versus when you will receive money to pay them. Considering these time gaps in advance can help you better manage liquidity.
Our recommendation: Use a spreadsheet to track all incoming and outgoing invoices. Drop a comment below if you want us to send you one!
Budgeting and Expense Control: Although we’ve discussed this before, setting a (conservative) business budget can help you better plan for upcoming expenses and ensure you have enough cash available.
If you see that expenses are increasing or they start impacting your bottom line, it’s essential to reevaluate and make changes through expense control (cutting costs, making a plan, and adjusting your budget!). While you want your budget to be as accurate as possible, inflation and unexpected expenses can affect it.
Our tip: accurately tracking your income and expenses will positively influence your liquidity management!
Contingency Plan: When it comes to a financial contingency plan for a fashion brand (or any business), the first step is writing down all the worst-case scenarios. Here are some possible situations:
Manufacturing facility shutdowns
Shipment delays
Global catastrophes (think 2020)
Supply chain disruptions
Staff shortages
Faulty items or products
Unexpected tax bills
Once you’ve determined potential situations, brainstorm possible solutions if any of these scenarios were to occur. Use your cash flow forecasting to create worst-case, average, ideal, and the best financial situations! Also, remember to establish an emergency business fund and stash away a percentage of your income every month so you can cover potential crises.
Regular Financial Monitoring and Reporting: The most important aspect of liquidity management is regular and frequent communication with your accounting team. They should provide short-term and long-term reporting and help you spot liquidity issues before they occur.
If you’ve never worked with a financial team, don’t worry – we’re not judging you! It can be scary to hand over your books. However, we’re available to help you with all your accounting needs so you can stay on top of your cash.
Drop any lingering liquidity management questions below 👇 and email us at info@yotamperets.com for your accounting needs.
How to launch a collection: Budgets
After creating your collection's sales forecast, it's time to apply that to your production budget—better known as your COGS (cost of goods sold) budget. If you need a refresher on financially planning a collection launch or creating a sales forecast, you can find a link to them in the comment section!
It will be difficult to price your items to earn a profit if you don't know how much it costs to create each piece. Here are some factors to consider when it comes to pricing:
Unit cost: To calculate the unit cost for every design in your collection, you need to know what it costs to make each item. For example, when creating a dress, it's important to factor in the following costs:
Materials: Everything needed to make the dress, such as the fabric, zippers, buttons, thread, and pattern.
Labor: Consider how many individuals are needed to sew the dress and how long it takes.
Manufacturing: Fixed and variable overhead costs, such as rent, utilities, storage fees, property taxes, factory repairs or maintenance, and anything related to the manufacturing process.
Adding up these three factors will give you your unit cost per design. Comment "Send Unit Cost Table" below, and we'll send you a spreadsheet that does all the hard work for you!
Tip: While looking at past unit costs is a great starting point, remember to factor in inflation and yearly price increases of materials and labor. If inflation is 4%, you should increase your unit cost by at least 4% (or else you’re losing money).
Unit Price: Pricing each item will consider the unit cost of producing it, along with several other factors, including operating expenses like storefront rent, utilities, marketing, sales staff, and anything related to running your business.
There are two ways to price your items, and it’s best to use a combination of both: selling price information from Income Statements and comparing to competitors.
Income Statements: Only available from public companies, you can roughly figure out their pricing by calculating the markup multiplier (Revenue/COGS) and then apply this multiplier to your own COGS to get your selling price. The markup multiplier will vary between companies, so it’s important to look at several Income Statements and take an average.
Competitor Analysis: How are your competitors pricing their items? Analyze the prices of similar products with your closest competitors and use that as a starting point for your own pricing!
Assess Demand: Which items sold well last year? Didn't sell well? What's popular or trendy this year? Answering these questions will help you decide what to focus on producing. It's important to approach it from a business mindset instead of a personal or emotional mindset - what you love might not be your customers' favorite (sorry to break it to you)
Once you answer the above questions, you can assign a number to each item in your collection from 1 to 3. Most likely to sell and do well: give it a 3; neutral about the item or not sure how it will sell: give it a 2; and for those more unique pieces that will be harder to sell: give it a 1. This process will help you determine how much to produce of each item.
Collection Inventory: After deciding the popularity of each item by assigning it a number between 1 and 3, you’ll want to make sure the quantities of each item build up an inventory with a retail value equal to the sales revenue goal. Figure out the quantities of each design, with the more popular items (those assigned a 1) getting produced more than an item assigned a 3.
Remember: assign quantities before starting production to guarantee you reach your sales revenue goal. Need help figuring this out? Comment “Send COGS Budget Table” below, and we’ll message you a spreadsheet.
COGS Budget: As a reminder from our first post in the series, your materials budget, labor budget, and manufacturing overhead budget all contribute to your overall COGS budget. While unit cost focuses on the cost associated with producing each individual garment, your COGS budget provides an overall estate of the cost of goods sold over a specific period.
You can calculate how much it costs you per budget to produce an item by dividing the total budget by the number of garments produced. For example, if all your materials cost €20,000 to make a dress and you can create 2,000 dresses with those materials, the cost per dress from the materials budget is €10.
Liquidity Planning: Cash flow is the secret to any successful business! Make a schedule of when payments are due and when orders will be paid to ensure you always have enough money in the bank! Knowing whether payments are net 30, 60, or 90 helps guarantee there is enough money to cover monthly operations.
When it comes to creating a COGS budget (or any budget in general!), it's always better to be on the more conservative side. This makes adjusting for unexpected income or expenses that may arise throughout the year easier! If you need help figuring out the budget for your next collection, comment "Send COGS Budget Table," and we'll send a spreadsheet to help you. 🎉
We’ve created a spreadsheet to make it easy for you to figure out your pricing. As always, reach out if you need help with any of the steps or want additional information.
How to launch a collection: Sales forecasting
In the last post we gave you a full overview of how to financially plan a collection launch, but you may be wondering, how and where do I start? The first step of financial planning is sales forecasting. It serves as a guide for all your future expenses.
Here’s a straightforward explanation to creating a reliable sales forecast, even if financial jargon isn’t your first language!
1. Start with the Company’s Historical Sales Data:
To analyze and make accurate predictions, your sales data will be your foundation, which you can reuse by creating a copy of last year’s sales data and editing it accordingly to your present situation. This means using this information as a base while excluding irregularities, such as special projects, that deviate from the typical financial patterns of the business.
Dive into the refined data to identify patterns and trends: Look for seasonal spikes, steady growth rates, or declines. For instance, if you’ve noticed a 10% sales increase every summer, factor this growth into your future summer sales predictions!
2. Incorporate Economic & Industry Trends:
Overlay your curated historical data with current economic indicators and fashion industry trends. Are consumers’ spending habits shifting? Is there an emerging trend that could impact demand? Adjust your forecast by a certain percentage to account for these changes.
A tip from us: use the latest financial statements of publicly owned companies in the fashion industry and analyze how their sales perform compared to last year.
3. Consider Operational Context:
Every fashion retail operation is unique. Reflect and adjust your forecast considering:
(a) Supply chain capabilities: maybe this year you’re able to produce faster, making sure popular designs get restocked quickly. Or maybe you found a way to produce for cheaper, allowing you to offer garments for a more competitive price. These would improve sales!
(b) Marketing initiatives: imagine you just kickstarted activity in a new social media, or your website traffic is higher than ever. This would certainly impact performance!
(c) Store expansions or closures: more channels and locations equals more traffic. If you've done a diligent research you should have a good feeling on the extra sales an extra store should bring about. Factor it in!
By considering these three aspects you can develop a sales forecast that adapts to both your story as well the business environment. This approach ensures that you’re navigating with a clear and informed vision of the future.
We hope this sets you on the path to a successful and stylish future!
In our next post we will dive into Production Budgets, follow us to make sure you don’t miss out!
If there’s anything additional you’d like to know - send us a message and we’ll be happy to answer 💙
How to launch a collection: A Financial Planning Guide for The Fashion Designer
It all begins with an idea.
Our friends at UY Studio just published that their chic collection reached their objectives. Good job guys!
But what does it take to plan a financially viable collection?
Our team has put together a detailed financial planning guide for you to follow, once your designs are ready and before you place your orders. This post provides a thorough outline, which we will follow step by step during the next weeks, digging deeper into details and helpful tools for designers, fashion entrepreneurs and anybody interested in learning more for future projects. Ready? Here we go!
Forecasts & Budgets:
A collection is an investment project. The first step in planning every such project is to forecast its cash inflows - the sales revenue. There’s no way to avoid guessing, but also guessing can be educated to ensure realistic goals. This is made by mixing together historical sales statistics, economic and industry trends, and some operational context (eg. “we’re finally targeting better on Meta!”).
Only once we know how much we will sell, we can decide how much to produce. The production budget (or better say, ”COGS budget”) is derived from the sales forecast, usually by using industry-standard benchmarks. It is most likely the general multiplier you use to determine the price of your products (see Step 2). The products made with this budget should build an inventory in the retail worth of the sales forecast.
Once the sales forecasts and product budgets were agreed upon, they become sales and budget goals, and are communicated to the sales team and production team respectively.
Product Specifics:
Once you’ve decided which designs cut into the collection, you need to determine each design’s unit cost - the cost of making one piece of the design live and ready. Think about all the work and material that ends in the piece as it ends its way at your customer’s home - fabrics, materials, labels, production etc.
Once knowing each design’s unit cost, it is time to decide on each design’s unit retail price. Pricing is an art of itself, and involves comparing customer demand analysis, competitor’s pricing and industry benchmarks.
Item Mix and Quantity
You know which designs cut into the collection, but how much should you order from each? Analyse the popularity of last collection’s designs, mix into it shifts in market trends, and assign each design a unit quantity so that the total cost of your inventory will fit the COGS budget. (Secret: the quantity assignment does not have to be done by trial and error!).
Budget Allocation
The COGS budget include many “sub-budgets”, some examples are: fabric, materials, production, and for some companies, it is important to include research & development (initial design ideation) costs, too. These sub-budgets should be defined before you place your orders.
There are two approaches to define these sub-budgets: (A) historical statistics and (B) based on the final item mix and quantity. A allows for quicker execution, yet for less accurate monitoring, while B takes more time to implement yet makes it easy to monitor.
Assuming you follow approach ‘B’, you can use the unit cost breakdown from Step 2, and sum each element once for each design, and once again for the entire collection.
Placing Orders
By now you got everything figured out to kickstart your plan. Go produce your collection!
Mastering financial planning is key to the successful launch of a fashion collection. We've covered the initial steps broadly, yet did not answer some crucial questions: (1) but how exactly? and (2) What do we do once something does not go as planned?
The next posts will answer these questions, one bit at a time. Follow our page to make sure you don’t miss out on these useful and actionable tips that will boost your fashion venture forward!