The fashion business operates seasonally, and the seasonal format produces a financial cycle that is hard to match in any other form of retail business.
Orders are made months before, merchandise is ordered and paid way before it is moved to the shop floor, and the sales are clumped in comparatively short selling periods, and have to earn sufficient margin that will carry the business until the periods of quietness that follow.
In the case of large fashion groupings with diversified sources of revenue and institutional facilities of credit, this rhythm is a controllable attribute of the business model. It is an existential challenge to independent boutiques, new designers, and smaller fashion enterprises especially when the time lag between the purchase or manufacture of the stock and the revenue of selling the stock is several months long.
Most fashion cash flow challenges have their root in the timing issue. Wholesale buying seasons involve the requirements and deposits prior to goods delivery, so the cash is out of business before a revenue may come to pass, three to six months later. Meanwhile, the fixed costs, rent, staffing, utility and insurance, will go on every month, irrespective of the selling season.
A fashion business, the spring/summer of which follows a low-key autumn, might end up in a most comfortable cash position in July, and an authentically strained one in November, though its annual trading may be as healthy as ever. The deliberate control of that cycle, instead of the wishful thinking that the good months will drag the bad ones along by default is what puts financially healthy fashion industries ahead of those who are constantly falling behind.
Planning Around the Revenue Calendar
The best beginning point in management of a seasonal cash flow is to develop a comprehensive annual cash flow forecast mapping out the expected income and the already committed and projected outgoings on a month by month basis rather than viewing the business on an annual or even quarterly basis.
The reason why monthly granularity is important is that the highs and lows of the fashion revenue are such that a month-level granularity can show funding holes that a quarterly one can completely overlook. A boutique which is fairly comfortably profitable in the aggregate over the period of the year, you will have two or three months of outgoings far more than you have of income, and it is this foresight, this foresight, of the future, preferably several months ahead of time, that enables you to take action, instead of merely taking the heat.
When it comes to the cost side, it has more flexibility than it might seem at first. You can significantly delay the cash outflows by negotiating long payment terms with suppliers, especially where repeat relationships exist and you have a history of paying them on time.
The smaller independent manufacturers and wholesalers who appreciate the relationship will allow staged payments or deposits in advance to the already established customers. The question is always worth asking, as the worst that can come out of it is an invitation to reconsider the payment schedule so as to eliminate the point of cash flow crunch without cost to either party.
Bridging the Off-Season Gap
When there are months to go before the difference between the income and outgoings can be bridged by restructuring the costs, external finance is occasionally the correct solution. The trick here is that it must be viewed as a planned, calculated instrument, and not an emergency solution, which would demand the forecasting skill mentioned above. A fashion company which predicts in September that it will run short of cash in January has considerably different options to one which finds out in January that it is indeed short.
When you have multiple months of lead time, you can go to lenders in a more financially stable position, give a realistic view of your business and its seasonality, and raise funds on conditions which actually reflect your true creditworthiness and not the emotion of urgency in your situation.
As an owner of the fashion business, whose personal credit history is not so good, possibly because of a bad trading time or an earlier venture that has not gone so smoothly, it is noteworthy that bad credit loans can be obtained with the help of specialist lenders who look more holistically at the issue of affordability and business viability than credit scoring would have done on its own.
These products are more expensive than mainstream lending which should be considered in your seasonal financial planning, but they can be real working capital support to the business with good business fundamentals whose owners have an imperfect credit profile. The fashion business is a business in which strong and innovative businesses are frequently founded by those who have made a risk and not always had the pay-off the first time, and the credit history of that track record is not always the present view of the business.
The eventual aim of any seasonal fashion business should be to make sufficient retained profit during the busier months to finance the slow months without necessarily having to depend on external credit.
This involves the management of the cash reserves of the business in a disciplined manner just like in the choice of the collection and withholding capital at the time of high sales as opposed to using the funds at once and creating a financial cushion that will continue to increase as time goes by. It is not as fast as using debt to expand more expeditiously, but it creates a more secure business which is not prone to the usual fluctuation of consumer demand throughout the fashion year.
