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!
