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.
