Some people believe bad things come in threes. If this is true, the tough trading period that has recently seen many fashion retail operations fold, could be over fairly soon – but there are a few hurdles to go yet.
According to Simon James, corporate finance partner at business, finance and accountancy firm HLB Mann Judd, the Australian market is currently in its third phase of business reaction to the difficult trading conditions since the global financial crisis (GFC).
The first stage, he says, was businesses cutting costs, making operations leaner, while the second saw a “fight for revenue where businesses became more innovative and looked to increase turnover and sales”.
Now, in the third iteration of the cycle, James – whose clients include fashion businesses such as Diva, Beachculture, Tigerlily, Gazal and Colette Accessories, says his firm has observed “a drying up of funding availability to businesses which is squeezing operations considerably, in some industries more than others”. Simply put, a cash flow crisis.
“The fashion industry has been hit hard, with many business seeing sales reduce whilst costs continue to rise. This obviously impacts the amount of cash available in the business,” James says.
“The biggest challenge for retail fashion businesses today is the constant volatility of business risk. Fashion businesses face the most volatile of business risks being currency fluctuations, long lead times and uncertain customer sentiment. This is making it nearly impossible for the merchandise managers and planners to project purchase orders with any confidence. The cash strain for the business by getting it wrong (over ordering) is also driving businesses to be more conservative and reducing range or order sizes.”
According to James, poor stock management and /or valuation is in fact one of the most common mistakes made by owners of fashion businesses and this, combined with poor consumer sentiment and the ultra-competitive market nowadays, has been the undoing of many an empire in recent times.
“In too many instances we see businesses that have not correctly assessed the value of inventory and are therefore kidding themselves over the financial performance of the business they are reporting,” he explains.
“If a business fails to write their inventory valuation down to a realistic level, then any financial results they produce are overstating profits.
The businesses that clear older lines quickly and effectively, perform better. The concept of hanging on to older products with the hope of achieving a good price in the future are long gone. Move it now, move it quickly and avoid the costs of storage, security and insurance of holding older items. Cash in the bank earns six per cent, stock in the warehouse costs four per cent.”
Kirsten Ainsworth, founder and director of beachwear business The Rocks Push knows this unwritten rule all too well, but says retailers in this climate must also be careful that they don't damage their brand permanently trying to get rid of old stock.
“Forecasting what customers are going to want six months before they have even thought about it is a risky business. Under-buy and miss out on sales, over-buy and hold too much stock. But continual discounting leads to eroding the perceived value in the brand and product in the customer’s mind,” Ainsworth explains.
Rather than get to this stage of damage control, Ainsworth suggests altering the way one does business to avoid any hurdles in the future that could impact cash flow.
“Some hurdles to maintaining good cash flow for fashion retailers include early and late deliveries of stock, poor forecasting leading to over and under-buying of stock, currency fluctuation, late paying or non-paying customers and late invoicing suppliers. So we now seek multiple quotes for all new and existing services and suppliers; monitor our cash flow monthly and make budgets for different business areas,” she says.
“In the wholesale business, we also credit check new customers and require upfront payment for the first order, we offer early payment incentives and we’ve implemented a late payment fee in our terms of trade. In the online retail business, payment is processed in real time and we process orders after payment is received.”
However, in addition to these common cash flow issues, James says fashion businesses should also watch out for the more sinister causes of money leaking out of the business overall, such as company fraud.
Although internal fraud is not often a concern that rings alarm bells for fashion companies, the uneasy trading climate has seen many businesses throughout the GFC reduce headcount and costs in their finance team, which could lead to increased risk for businesses of all types and sizes.
“The fashion retail sector has long been aware of fraud in terms of product theft from customer and staff, however corporate fraud in the accounts department is now a higher risk due to the reduced headcount numbers,” he says.
“Many business owners do not appreciate the risks associated with online banking systems, particularity in relation to changes to the banking details of suppliers, so anyone that has not had a review of their on-line banking system, is at risk.”
Last but not least, James cautions fashion companies against losing sight of their initial business goals and objectives – especially if the operation is family-run or owned by more than one business partner.
Although being on the same page might be a business basic, James says it's easy for business owners to get off the main track, which could lead to confusion, mixed priorities and a mismanagement of company cash, and where or when it’s invested.
“Refreshing business plans with owners is the best way to kick-start businesses. Taking the time out of running the business to focus on strategic direction is fundamental,” stresses James.
“Everyone should have revisited their business plan in the last 18 months in consideration of the new retail environment we work in. The business plan only needs to address two simple questions: ‘how to compete?’, and 'where to compete?'. Everything else will flow from this.”
Top five tips to improve your cash flow
- Have a good foreign exchange strategy in place. What business are you in – FX hedging or retail? Let the experts look after foreign exchange and concentrate on what you are good at. - Make sure you have a banker that understands your business. I see business bankers on a daily basis, and having a good relationship manager on your account is critical. If he/she is no good, get another one. - Have a robust forecasting model. If you do not have confidence in the cash projections provided by the finance team, be very worried and get it fixed. - Look for opportunities to reduce the seasonality in the business. Constant cashflow is better that peaks and troughs. - Don’t hold on to slow moving stock. Better sold and banked than sitting in store or the warehouse.
