Fashion Financial Forecasting

Fashion Financial Forecasting

A Simple Way to Project Profits for Your First Season and Beyond…

Since fashion is a passion driven industry many entrepreneurs find it hard to resist the temptation to overestimate potential sales. I do agree..its only fair to believe that if you put your heart and soul into your collection that it will fly off the shelves and be the next big thing.

But at the same time if you rely financially on this wishful thinking it could leave you up the proverbial creek without a paddle. Many new brands have the idea that if they could just get started…big profits will jump in and help them fund their operational costs.

Unfortunately unless you’re operating a very grass roots business it can take quite a while before profits become a signfigant source of funding. Many times for boutique driven lines profiting even 5K in the first year is considered a big stretch.

So how can you determine some legitimate possibilities?

Here’s a simple eye-opening exercise you can do to figure out your likely bottom line. I’ll illustrate the process by brainstorming some rough but realistic projections for the 1^st season of a high end clothing line….

Step 1: Think about your strategy.

Since we’re talking about a higher end line in this example let’s assume for the 1^st season we’re focused on selling to a hand-picked batch of boutiques. Getting the big volume business of department stores is unlikely to happen in any company’s first season.

If you hire a salesperson since they know your market they may be able to clue you in as to how many stores you’ll be able to get into your first season as well as the average number of pieces a store may buy. These numbers will be the foundation for your financial estimates.

In this instance based on our sales strategy we estimate we’ll be able to land this line in 10 boutiques. Be careful in exaggerating this number. Many buyers are hesitant to buy from spanking new lines…so you’ll need time to build momentum.

Step 2: Set your profit margins.

Keep in mind…the only money you will make exists between the production cost of your product and the wholesale price you sell it for. This is your profit margin.

Start by doing the math to determine the average profit margin for your line. To do this first tally up all the costs it takes to produce your product (fabric, cutting, sewing, trims, hangtag, shipping…etc).

Then set the wholesale prices that you will charge retailers for your product. For this you normally work backwards from your suggested retail price. You want to ensure whatever you sell your product to retailers for that they can mark it up at least 120% to get to your suggested retail price.

Step 3: Get to the Bottom Line….

To get come up with a bottom line you’ll have to induge yourself in a few more basic calclutions…

In this example we’ll assume the average cost to produce our products is $20. And based on our positioning in the marketplace our average retail price is $80.

Working backwards we know in order to allow our retailer to markup to our $80 retail price (again a fair markup is approx 120%)….. we’d have to sell our products to retailers at a wholesale price of about $36

That gives us our average profit margin---- $36 (wholesale price)- $20 (production cost)= $16 per piece profit margin.

To take it a step further….since the boutiques we sell to are small ----based on our sales strategy we estimate each of the 10 stores will buy about 12 pieces. (again…sales reps can also give you an idea of an average order size # so its most realistic).

Finally we get to our overall projection…

10 stores x 12 pieces each x $16 (profit per piece)= $1,920 seaonal profit.

And just for the fun of it lets knock off 15% for either sales commissions or sales costs.

That leaves us with grand total profits of $1632 for our first season.

We’ll also probably end up deducting from this final number with things like damages and discounts as well.

If the potential profits you come up with just won’t do…. you can do things like tweak your costs, position your brand for a higher retail price, or decide to produce a collection that is more likely to result in higher volume.

By doing this bit of mental legwork beforehand you can be much more proactive in adjusting your strategy and ensuring you’re financially setup to succeed.