Langsey Company's Li Zhang is your insider industry guide to all things China. Here, she tackles costing.
Recently, I had coffee with one of my customers who owns a boutique fashion brand in Australia. As we talked, I was surprised to note that when my friend calculated her retail price, she actually ignored many of the implicit costs of her business.
What do I mean by this? I mean that she only kept in mind the cost of purchasing products – that is, the explicit costs – and while this is indeed the biggest part of the cost, it is not the only part!
This conversation got me thinking about the importance of calculating and managing both implicit and explicit costs in business.
Calculating Explicit Costs for Fashion Brands
First, let’s take a look at what we mean by explicit costs.
An explicit cost is a cost that occurs, is easily identified, and is accounted for in business documents or financial statements. It represents clear, obvious cash outflows that reduce the bottom-line profitability of your business.
So for a fashion brand, the most obvious explicit cost is the cost of goods, which means the money you pay your supplier to get your apparels made.
For a fashion company, the cost of goods may include:
- Fabric – including raw material and dyeing
- Accessories – buttons, zips, beads, lace, etc
- Labels and packaging – main label, wash label, swing ticket, wrap tissue paper, plastic bag, etc
- Labour cost – the longer the supply chain is, the more labour costs will be included; eg: a piece of apparel with printing will need labour costs of raw material factory, fabric dyeing factory, fabric printing factory, and the cutting and sewing factory
- Logistics – not only the freight from the overseas port to your local port, but also the delivery from the factory to their port, and the delivery from your port to your warehouse
- Tariffs and customs clearance
- The suppliers’ profit – again, the longer the supply chain is, the more suppliers in the chain need to make a profit, although there is normally very small margin in this industry
You might have already experienced the shock of seeing so many costs occurring in your supply chain? That’s why working with an experienced supplier is important, otherwise you will have to deal with all the different parties directly and negotiate all costs separately – which at the end of the day, will cost you much more.
Calculating Implicit Costs for Your Business
Now, let’s think about the implicit costs that occur on your side, which are a bit more difficult to identify or quantify.
In economics, an implicit cost means the opportunity cost equal to what a business must give up in order to use its resources, or the ability to earn money off the use of the resources elsewhere.
For example, if you have decided to give up your current job in a big company to focus on starting your own fashion brand, there is an implicit cost of giving up your current income from your employer.
In the case of your small or start-up fashion business, the time spent promoting your brand on social media (marketing), communicating with your designers and suppliers (merchandising), and communicating with your customers (customer service) does actually cost, even though you have done all these things by yourself and haven’t paid anyone else in the process.
But as I said above, in doing this, you have given up the opportunity to earn money by doing other jobs. The opportunity cost discussed above is generally worthwhile, as you have dedicated yourself to your fashion business.
However, there is a more tricky and hidden implicit cost that I always remind my customers to pay attention to – the cost caused by poor inventory planning.
Inventory planning is the process of determining the optimal quantity and timing of inventory for the purpose of aligning it with sales and production capacity. It has a direct impact on the company’s cash flow and profit margin, especially for small businesses that rely upon a quick turnover.
So can I ask: do you even do inventory planning? I have to say, not many of my clients do, which is a pity.
Without smart inventory planning, you may:
- Lose the opportunity to sell and earn money in the most correct season
- Miss the chance to sell and earn money when you have the biggest number of fans on social media
- Carry stock in your warehouse or home for a long time
- Sell out your new products too easily and lose the opportunity to make more profit, considering the fixed cost is there – please keep in mind: selling out too quickly is not worth being happy for at all!
As you can see, it’s really important to take into consideration both the explicit and implicit costs when managing your fashion business. That way, you are giving your brand the best chance to succeed.