By Jill Mazur, January 26,2016
It’s a fact of life that many apparel, textile, accessory, footwear and home goods companies become cash poor. For people, or companies, who are just starting out in this business it’s a harsh reality to face, and one that’s not easily overcome. Many people start a business by creating a business plan. I’d recommend you take it one step further and create a realistic budget as well. You may find this exercise quite eye-opening.
It costs a lot of money to start a viable business; designs, patterns, materials, samples are only the beginning. Marketing, sales and tradeshows are all ongoing costs of doing business. Salaries, overhead, rent, mileage re-imbursements and more eat into your budget. And then your business starts to take off. Now you have sales orders to fulfill and conceivably more people to hire. Great! That means sales revenue will be money coming back to you, at some point in the future. In the meantime, you’ll most likely be working with one or more suppliers, factories and vendors to fulfill those sales orders. Then you’ll need to ship your products to your customers. Then you’ll wait, and wait, and wait some more until you get paid. In the meantime, you’ll be responsible for paying your suppliers, factories, vendors, salaries, overhead, rent and all other related bills.
It starts to add up. Your cash flow is heading in one direction…out the door. It’s difficult to plan ahead, but here’s where creating a realistic budget and working with a knowledgeable accountant, or other financial professional, will be incredibly helpful. Before you start down the path, get a realistic understanding of how cash flow works.
In order to produce samples or products, you will need one or more suppliers to make these items. You will issue purchase orders to the suppliers and, upon receipt of the goods, you will be responsible for paying for them. Many new, or small, businesses may have unfavorable credit terms, such as COD (cash on delivery), cash in advance, or credit card payment. You’ve now paid for your items. However, when shipping products to your customers, you may not necessarily be able to get paid immediately upon delivery. Most retailers take product with sales terms of Net 30, Net 60, 8/10EOM (8% discount when paid within 10 days of the end of the month), etc. And retailers are notoriously late with their payments. You want to sell product in their store? You’ll take the payments when you can get them. Somehow, there’s a lag of 60 – 90 days or more before you can get paid for your product, when you’ve already paid your vendors. And now you have to cover your expenses as well. But how?
That’s where the budget comes in handy. When you look at your cash outlay as well as your income, you can start to make better decisions. Projecting your expenses over the course of a season will help you understand your financial requirements. Large expenses may need to be put off for a few weeks, or months, until you’re receiving payments from your customers. Charging items on your credit card seems like a great way to delay payment for a while. And it can be, so long as you pay off your credit card, in full, every month. Don’t get trapped into racking up bills and only paying a partial amount each month. The interest charges alone will kill your profits.
So what do you do when you need to help ease the burden of mounting bills and expenses?
Small Business Administrations (SBA) loans may be available to help you start, or expand, your business, especially if you don’t qualify for a traditional bank loan. Again, having a financial plan and a budget will help you understand your needs and is most likely required as part of the loan application process.
Factoring your receivables allows you to sell your accounts receivable invoices to a third party commercial financial company / factor, who then assumes the financial risk of owning the invoice. That means the factors assumes the credit risk so you are not responsible for the loss if the customer does not pay the invoice. If you are able to have a borrowing factoring contract you can then borrow against your unpaid accounts receivable, up to 80%. This allows you to collect your cash directly from the factor faster than you would if you waited for your customers to pay you. Depending upon your agreement, the factor will take a percentage of the invoice value as payment for their services as well as an interest cost on the amounts borrowed. Faster payments on your accounts receivable invoices may give you the liquidity you need to keep your business running more smoothly.
Accounts receivable financing allows you to borrow from a bank or finance company against your unpaid receivables. This is similar to factoring except you are responsible for the customers’ ability to pay and you must collect the invoices.
Lines of Credit may be available as well. If your company has enough assets, has been in business long enough and has a proven track record you may be able to apply for a line of credit. Typically the best rates will be through your bank, which may also provide additional services with your line of credit. Beware of certain types of credit lenders who prey on small businesses in need of quick cash.
Managing your cash flow can be one of the most challenging parts of owning a business. Staying on top of your expenses and receivables will help keep you afloat. Be smart when it comes to your cash outlay and be patient when it comes to your cash influx. If you think you’re getting in over your head, ask for help. There are a lot of resources and knowledgeable people with the experience you need to turn your fashion dreams into a profitable reality.
Contact us today for more advice on how to grow your business. www.fashionbizinc.org
Jill Mazur is a Fashion Business, Inc. and independent business consultant to the apparel and footwear industries, based in Los Angeles, California.