Cash flow is essential to the survival of a business – arguably more so than profit in the short term. Profit may be essential in the longer-term, but in the short-term cash is needed to pay bills and operating costs. A business with good cash reserves can survive until it becomes profitable. A business that runs out of cash needs to find a solution quickly to avoid going bankrupt.
The very nature of how the fashion industry operates – season by season – and the process by which a collection is developed and finally sold cause cash flow issues for businesses in this sector. Quite often fashion businesses are significantly undercapitalised to cope with the cash flow demands of setting up the business, developing a range, producing and selling. There are many steps along the way to selling a collection which involve laying out funds before receiving money back from sales.
In order to manage your money planning is essential. You must decided on the costs to build the collection as well as produce it and pay for your overhead. You will have to have this money in the bank in order to pay these expenses.. Be rigorous in keeping your costs in line with your plan.
As you start to receive income from shipping product keep enough money in the business to keep it running smoothly. Save for a rainy day. Jim Salmon, VP of Business Services at Navy Federal Credit Union, the world’s largest credit union said, “It’s a sign of strength and maturity for a small business to have a cash reserve. It’s the smart thing to do.”
Work with your lender to set up a line of credit. This can help you through the slow periods. Even when you are first starting out you should ask your bank for a small line of credit in order to start building good credit for your business. Pay quickly in order to maintain good credit. I once had a client who had a major increase in business that he did not have the funds to produce. Unfortunately his credit rating was so low the best interest rate he could get was at a 29.9%!! An interesting article to read is “How To Build Business Credit For Your Start Up” by Marco Carbajo, for the SBA,”
Utilize vendors for short term credit. Negotiate with vendors. Ask your vendors and suppliers for a discount or extended payment terms that better suit your business needs. Build relationships with suppliers
Engage in cash planning. Forecasting and budgeting will help you see the “big picture” and prepare for the ups and downs of a seasonal business. Projecting your income and expenses and keeping a close eye on inflows and outflows is vital.