When it comes to fashion start-ups, the hot topic is always funding. How do you find funding to launch your collection? How do you fund production, pay for samples, fabrics, labor, etc. Often the conversation is about the lack of money and how much it costs to produce a collection, but rarely do we talk about managing money, budgets and calculating profit - all of which are vitally important to the success of a fashion business.
Regardless of how talented you are, how incredible your designs may be or how much media attention you receive, you have to have a strong understanding of your finances. You have to be able to build a business with a solid financial foundation that lasts. 90% of fashion start-ups fail within the first 3-5 years and an even higher number fail to even get their businesses up and running due to issues with cash flow.
There's no denying that it takes money to make money and that producing a collection is expensive, however, to be successful you have to think like an entrepreneur and treat your label like a business. A huge part of that is getting a handle on your finances.
To get you started on the right path, here are the basic steps to budgeting for fashion brands.
NO° 1 STOP PRETENDING YOUR FINANCES DON'T MATTER.
A lot of people have the habit of ignoring their finances because it seems like too much work or they just don't want to know. They avoid checking their bank accounts on a regular basis because they don't want to see how "bad" it is. On a personal level, this is a bad habit. As a business, this is detrimental.
Ignorance is not bliss. As a business owner, you need to know where you stand financially at all times. You need to know what's coming in and what's going out. So you sold three dresses at a local pop-up shop. Cool. But if you're selling the dresses for less than what it cost you to make them you're losing money. I get it, managing your finances can seem intimidating and at times it almost feels better to just ignore them. But, you simply can't if you want your business to grow. If you're content with running your label as a hobby and maybe not make money, then keep doing what you're doing. But, if you want to be able to live your passion and turn your label into a full-time, profitable 9-5 thing, you've got to stop ignoring your finances.
NO° 2 LIST EXPENSES.
The first thing you need to do (after deciding to get a handle on your money) is to make a list of all your business expenses. These expenses can be split into two categories: Fixed and Variable.
Fixed Expenses are expenses that stay the same every month. (For example: rent, insurance, phone bill, labor. NOTE: Paying yourself a salary is also a part of your overhead costs and should be included in your fixed expenses. So often creatives forget to pay themselves. Don't exclude yourself from the party.
Variable Expenses are expenses that may change from month to month. (For example, event cost, fabric, model costs, photographer costs, etc)
NO °3 CALCULATE BREAK-EVEN POINT.
Your break-even point is when your total revenue exactly matches your total expenses. This means that you are bringing in just enough money to cover your bills but you aren't making a profit. As a business, your goal is not to simply break even. You want to make a profit that allows your business to grow. However, it's necessary to first figure out what your break-even point is so you can appropriately price your line.
So, based on all your expenses, how much money do you need to bring in JUST to break even? For example, let's say that between your fixed and variable expenses your monthly expenses are $600. This means that in order to just break even, you need to make $600 in sales each month.
NO° 4 SET PRICES
Pricing your line is often a dreaded task for designers. Pricing too low can make your product seem "cheap" (not to mention you could lose money) and yet, pricing too high can alienate and eliminate part of your demographic. When it comes to pricing, from a financial standpoint, keeping it very simple your price should equal your break-even point plus the profit margin.
Price = Break-Even Point + Profit Margin.
Retail Price = (Development Cost) + (Production Cost) + (Materials) / (100 - Margin percent) / Quantity
So, at a 50% margin
Retail price = (($2300 + $2900 + $1600) ÷ 50%) ÷ 200 units = $68.00 (example from Maker's Row)
At this retail price, you are covering is covering the costs of production, your salary, your overhead costs and allowing yourself to make a profit. This means that you need to sell 200 units at $68.00
No° 5 SET GOALS
Goals are often overlooked but absolutely necessary. Not only do goals give you something to work towards, but they also give you a game plan and essentially a step-by-step guide to growing your business by working backwards. Let's say you need to sell $600 worth of product just to break-even. You could then set a company goal to sell $900 in product and then work backwards by creating a list and deadlines for everything you need to do in order to achieve that goal and make it a reality.
From fabric, to production and manufacturing to labor and showroom charges, photography chargers, it can take a lot of money to produce a collection. As a business it's really important that you track every dollar in and every dollar out. You can get all the funding from friends and family, crowd funding and investors but you need to know what's going on with your finances to see if your business is actually successful or if adjustments need to be made.