In this special edition of Money Talks, finance expert Matthew Nolan offers advice to emerging designers on how to trade for success.
Poor cash flow management is the number one reason businesses fail – even profitable businesses can fall prey to its affects. Growing sales is every fashion business owner’s dream, but it can quickly turn to a nightmare as the cash flow demands in your business grow even faster. So here are some essential principles that can be applied to your new fashion business to have a healthy and sustainable cash flow.
Keeping track
Cash flow refers to the inflow and outflow of cash in your business. Inflow is generated by the sale of products or services; outflow includes all fixed and variable costs, such as rent, repayments on equipment, salaries and so on. It’s measured by when the cash is actually received or paid out, not when purchases or sales are made on paper.
There are two main factors that affect cash flow. The first is your receivables –the timing of those payments made to you for the sale of clothes.
The second is your payables. Payables can include anything from staff costs, shop rent or raw materials that you cut and sew into finished garments. These will need to be paid for either up-front or in arrears, such as seven or 14 days later.
You’ll also need to keep tight control of how long it takes to turn over stock, as this time is on top of delays in receiving payments once sold.
Give and take
The most frequent cash flow problems arise from the lag between payments from your customers and the demands for payment from your suppliers. Your fashion business will be hamstrung if customers are taking too long to pay and suppliers are demanding payment.
Administration – While not everyone’s strong point, keeping on top of your accounts is a key priority for any business. An ‘aged debtor list’ can help you keep track of slow or overdue payments as well as identifying habitual late payers. Keeping tabs will also help identify any upcoming cash flow crunch before they arrive.
Contact and review – Communicate regularly with your accountant and bookkeeper: if a cash flow crunch is around the corner they’ll help identify a potential problem and offer suggestions to manage it. It might be as simple as altering some payment terms. It’s important to take stock of your business position regularly – assess your sales performance, look closely at costs, and consider how things might be improved.
Terms and conditions – Ideally your customers will pay for goods up front, but if not you’ll need to set payment policies and ensure they’re adhered to. You might choose to invoice at seven, 14, 30 or even 60 days; but make sure you can afford to offer these terms before doing so. You should set out any penalties for late payments.
Stock planning and warehouse management – Whether you’re in the business of wholesaling or retail, make sure you have adequate supplies of stock and inventory on hand to meet the demands of customers, but don’t over-commit.
It’s essential that you know what stock you have on hand and what lines or items are moving quickly before you begin to purchase new stock. Excess stock means money tied up when it could be used more smartly elsewhere. It also means less room in which to stock other, perhaps better moving, items.
Implementing basic financial principles such as these will help ensure you’re better equipped to manage your cash flow. Best of all, if you have a cash flow surplus, you’ll be able to explore ways in which to expand, focusing on sales and other business building initiatives rather than concerning yourself about cash flow obstacles.
Matthew Nolan appears courtesy of PPB Advisory, an Australian strategic and advisory practice. He has over 20 years’ experience in banking and finance, specialising in SME management.