Authored by Imran Amed and can also be found here: http://is.gd/XRNnTX
This is the fourth in a series of articles on the Business of Fashion basics, and is taken from the business of fashion website. Originally published in 2007, this series is used to educate those interested in going into the business of the fashion industry. NosaFashions claims no copyright to this material and is used strictly for educational purposes.
So you’ve done it. You’ve cobbled together some financing from family and friends or squeezed a loan out of your bank manager. If you’re a little farther along, perhaps you have managed to raise an injection of capital that will help take your business to the next level. The question is, now what to do with your funding? And, how do you make it last?
It’s likely that you will have had to agree fund allocation to some extent with your investors prior to securing the funds, but it will be important to re-visit and re-confirm this now that you are past the negotiation stage. In reality, you will make spending decisions every single day, how ever small. The fourth part of the BoF Basics discusses the allocation of your capital, or more simply, how and where to spend your money.
The easiest way to think about allocating capital is by using a series of principles. Allocating money is about tradeoffs, and making those tradeoffs means choosing between spending on things that might seem equally important, on the surface. For example, every fashion business will have to choose how much money to spend on building and shaping a collection and how much to spend on actually selling the collection. How do you make these decisions? By using the principles below combined with the priorities for your own business. The ultimate decisions may differ from business to business.
So here they are, the 5 principles of allocating money in an early-stage fashion business:
Key Principle 1 – Carefully manage product development costs
While fashion is a product business that often comes with exacting standards, it is still important to carefully manage your product development costs. Creating large, unfocused sample collections with very expensive fabrics can be a death knell for a young fashion company. Not only will you have spent a fortune on developing a set of samples, you may have also created a collection that could never sell at retail because it would be far too expensive. Always use a collection plan to specifically identify the size, structure and price points for your collection, and select your fabrics with this in mind. This way, you won’t need to buy a bit of everything and sort things out once you are back in your studio, wasting money and time all the while.
Key principle 2 – Advertising is a cash sink
As a young designer, you probably don’t need to spend money on advertising, and the expensive photo shoots and super slick branding that come along with it. You can still craft a very strong profile by building relationships with editors, journalists, photographers and fashion insiders who take an interest in you and your work, and may help you for free. Those relationships will not only generate valuable editorial, their impact will also be felt longer than even the best-placed one-page ad in Vogue. As a young designer, you have a new and interesting story to tell and people will want to tell it too — you don’t have to pay them for this privilege. Supplement this with a professional looking website that is in tune with your creative vision and a clear brand identity that speaks to who you are creatively.
Key principle 3 – Focus on growing sales
As a growing company, you will likely be best off allocating your capital to people and assets that help increase your revenues. While you must invest time and resources into your product, brand image and identity, it is crucial that you are able to then leverage this raw potential to sell. Even if you have a strong collection and a growing brand profile, this will mean nothing if you don’t have a professional sales organisation to support it. One of the first people you should consider hiring is someone who can help you with sales. Also, investing in an e-commerce portion of your website (or through a partnership) helps you to increase both sales and profits, as you begin to capture the full-retail margin.
Key Principle 4 – Don’t forget about working capital
Not all of your funding should be invested in fixed assets like sewing machines, office furniture and computers. You will also need funding to make sure you can counterbalance the difference between the cash coming into your business (e.g. from sales, sponsorship and consultancy) and the cash going out of your business (e.g. for fabrics, rent and salaries) In a growing fashion business, the amount of working capital tends to grow quickly as payments for clothes delivered to stores are often not received until well after the designer has made significant investments in everything it takes to bring that collection into a store – a large part of this is a variable cost of fabrics and productions costs that will increase with time as your business grows.
Key principle 5 – Use a budget
It is absolutely essential that once you have thought these issues through, you create a budget to track your spending against your plan. Without this roadmap of sorts, you could lose control of spending and suddenly find yourself without enough money to keep your business afloat. You should track your budget, at the very least, on a monthly basis, which means investing in a good bookkeeper to help you regularly track your accounts.
Next time: Value Chain – Design and Development
The design and development process is often a very personal one that differs from designer to designer. It is important to keep this process free and unrestrained to unleash the best ideas, but there are also things designers can do to stay on track and manage their time (and their team’s time) efficiently. For fashion business people in particular, understanding your designer’s creative process is a crucial part of a successful creative-business partnership, and so designers must also be able to explain to others how you work, in order that they can work with you.
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