The word finance is enough for some designers to crawl underneath their sewing machine and say they’re never coming out. But not you ,because you know better! Finding all the finance advice you need is time consuming and hard work, we could all use a little cheat sheet. Here is a list of some of the best finance tips for your fashion business.
Your Assets + Your Liabilities = Your Equity
Can I just stress how much this should be ingrained in your head? Your assets (what you own) added to your liabilities (what you owe) equals what you have. Your Equity is how you finance your business. It’s important to know the difference between what you own and what you owe because that separation judges the health of your brand.
If you owe more than you own, then you are in a little trouble. If you own more than you owe then your company is healthy, on a very simple surface level.
Equity vs. Non-Equity Financing
How you decide to fund (or finance) your company can make or break your success.
Equity financing encompasses angel investments, venture capital, and strategic financing. All these forms of financing involve raising money from outside investors by giving away a stake of your company or being charged management/performance fees.
Non-Equity financing defines self-financing (bootstrapping) and debt/bank financing. This includes using your own money to support your business to taking out a business loan from the bank.
Yes…I said ratios. There are a number of formulas to assist you in better analyzing the health of your business. To jump into specifics, profitability ratios focus on how well your business is making money.
There are many different ratios, but specific ones will focus on certain aspects of your business. For example, the return on assets ratio, or return on investments, takes your net income and divides it by your total assets, providing you with a percentage of how much money you are making compared to what you own.
To take it a bit further, it is analyzing how much sales you are generating from your total assets.
To get a list and explanation of the most important profitability ratios, click here.
Balance Sheet, Income Statement, Statement of Cash Flows
In a previous article, we discussed some crucial steps to handling your fashion business finances, which involved creating your balance sheet, income statement, and statement of cash flows.
These documents are recordings of all your finances and each statement zeros in on a specific view.
- Your balance sheet maps out our #1 tip, your assets and liabilities equal your equity.
- Your income statement maps out how much money you are making and where it is going, ending with your net income: the amount of money that you make after all your expenses.
- The statement of cash flow draws out where all of your cash goes and comes from.
These documents will be difficult to start, but there are multiple websites available to give guidance. For example, TD Bank provides a lengthy breakdown of how to prepare your balance sheet.
Excel & QuickBooks
Your finance saviors! These applications may cost a fee but trust us—it’s worth it. Excel allows you to create infinite spreadsheets and complex formulas allowing you to present and manipulate your numbers. QuickBooks is a accounting software that helps you organize your vendor payments, payroll, and track sales and expenses just to name a few of its helpful features.
These applications may be intimidating a first but there are a multitude of classes and YouTube videos available for your use to learn the ins and outs. Once you get the hang of it, you’ll wonder how you ever operated your business without them.
BUDGET, BUDGET, BUDGET!
We know you’ve heard it 100 times; well we are here to tell you it for the 101st time. Create yourself a business budget! And remember to separate your personal finances from your business finances.
Search for Tips & Tricks…
Finance is not only about what you know but about what you need to learn. Always search for finance help on the internet. Many designers are intimidated by finance and may not know where to start or may be in fear that they won’t understand it. Just typing a question into Google search can help you solve your financial woes.
There are many websites dedicated to providing you with the best personal and small business financial advice, here are some sample articles to get you started: CNN Money Essentials, WSJ Accounting 101, and Creative Financing Methods for Startups.
Beware of Investments
There are so many ways to raise money in business; it’s difficult to find the right way for you. This cheat is not to tell you which way is the best way to gain investments for your brand but to stress how important it is that you research and thoroughly think about what type of investments would be right for your brand and yourself as an owner.
Businesses that are self-funded usually spend their money more efficiently than companies that acquire outside equity. Getting funded from the bank will require a solid business plan and presentation to the lender.
Having investors can be invaluable and provide a ton of growth; however you have to contemplate on how much stake you are willing to give away to your investors. Crowd-funding is picking up a lot of momentum in the fashion industry but make sure you are aware of the logistics involved.
Know & Improve Your Average Order Value
We have shared with you what your Average Order Value is, how to use it to analyze your business, and how to increase it. AOV is included in this cheat sheet to remind you how important it is to know and use.
If you can predict how much money you make through one order and why, it’s easier to find new ways to improve your sales points. Your AOV is also of interest to any investors, advisory board, mentor, or buyers looking into your brand.
Time is Money and Timing is Everything
We’ve all heard the phrase “time is money”, but we’re here to tell you timing is just as important. When dealing with your finances, the earlier the better. If you wait until you need money to start analyzing your finances, we can almost guarantee a tough uphill battle to the top.
However, when you start planning ahead, you are creating a clear financial highway for your business. This does not mean you will never have a setback but with timely planning, that set back can be reduced and contained.
It doesn’t stop at just budgeting; you can plan and time the best and most price-efficient area to host an event, months in advance. You can save to buy the high-quality fabric for your next line or even upgrading to a better showroom.
When talking finance, you are also talking about time. Money now can be worth much more in the future so it is vital to plan, analyze, and save starting now.
Hope this fashion business finance cheat sheet gives you new ideas and insight on how to conquer your future finances.
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