OK so this post is way overdue! I have to admit that sometimes I hesitate to write on a topic because I haven’t completely figured it out yet. BUT I have reminded my self of my committment to my readers to not share all the answers but what I have learned so far on my journey that may help others. So here it is my list of what I know about cash flow and a fashion business.
1. It sucks. But it must be mastered if you want to run a successful profitable business.
2. You need a line of credit but most banks won’t give you one in your first couple years until you show increased profitability and a certain level of income from your business. This means you have to rely on credit cards with usually higher rates in the meantime.
3. When you are ready to apply for a line of credit be sure you have: a tax return of the most recent year. A profit and loss sheet showing you are not spending more than you are making. Banks want to loan to people they know can afford to pay them back.
4. Be smart about what you use a line of credit for. Using it for production costs until your customer pays for the order (since you front production costs) is a smart way to use the line of credit. Buying all of your materials up front so you can receive a discount is another smart way to use your line of credit. Redecorating your studio is not a smart way to use a line of credit. Wait until you have cash in the bank for something like that.
5. Know your terms. If you have to pay your line of credit back every 30 days you need to make sure you are managing your production and cash flow effectively. If you are not good with numbers hire a bookkeeper. Yes it’s an expense but much less costly than all the interest fees and potential loss of your line of credit.
Ok so all this talk of line of credit. Do you really need it? Why should you consider it?
1. You have opportunities to go into larger ventures. Often deals with larger companies have net terms and high volume. If production is going to cost $5000 dollars and you won’t get paid on your order for 60 days the line of credit bridges the gap.
2. You currently buy your supplies in small quantities and as such pay a higher price for goods. With this you run the risk of the supplier running out of your material when you need more. However you can’t afford to buy more at one time due to cash flow. This really applies to businesses that wholesale and plan their seasons 6 months or more in advance. Cash flow aside (If you pay $12 a yard because you buy less than 15 yards at a time consider that you can buy 30 yards for the same price at wholesale. Start calling the direct manufacturer if you are currently buying from a distributor.)
3. You are having a hard time paying for both your household expenses and fronting the production costs for your business.
My husband was in banking prior to joining kangacoo designs and still I was denied my first time I asked for a line of credit. It’s very important to find a bank that deals with small business start ups and will take the time to tell you the requirements they have for offering a line of credit. Not all banks have the same requirements so shop around.
Cashflow really goes hand in hand with production managament, sale management and also in making smart choices when buying services to help you atart up your business. I will talk more about this in the coming months. In the meantime I welcome your questions on cash flow. Email me email@example.com.