Fashion Financial Forecasting

Fashion Financial Forecasting: A Simple Way to Project Profits for Your First Season and BeyondBy Ralinda Harvey, Director of Marketing & Merchandising, FashionablyMarketing.MeSince fashion is a passion driven industry, many entrepreneurs find it hard to resist the temptation and overestimate potential sales. I know, it’s 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. This is slightly wishful thinking. If you financially rely on it, 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 several years before profits become a significant source of funding. If a boutique driven line can profit even $5,000 in the first year, it’s considered a huge accomplishment.So how can you determine some legitimate possibilities? Here’s a simple 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 first season of a high-end clothing line…Step 1: Think about your strategySince we’re talking about a higher-end line, let’s assume for the first 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 single store may buy. These numbers will be the foundation for your financial estimates. From this example, our sales strategy has us estimate we’ll be able to launch the line in 10 targeted 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.Note: To learn more, review articles on social media marketing, developing an online audience and online marketing strategy.Step 2: Set your profit marginsKeep in mind that 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, tally up all the costs it takes to produce your product (fabric, cutting, sewing, trims, hangtag, shipping et al.). 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 make sure your product allows retailers at least a 120% mark up to get to your suggested retail price.Step 3: Get to the Bottom LineTo get come up with a bottom line you’ll have to indulge yourself in a few more basic calculations; for this example, we’ll assume the average cost to produce our products is $20. Based on our cost positioning, our marketplace average retail price is $80. Working backwards we know in order to allow our retailer to markup our product at $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, based on our sales strategy, we estimate each of the 10 stores will buy about 12 pieces (since the boutiques we sell to are small).Finally we get to pièce de résistance – our overall projection!10 stores x 12 pieces each x $16 (profit per piece)= $1,920 seasonal profit.And just for the fun, and another sweet dose of reality, lets deduct 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 a bit of mental legwork, you can be much more proactive in adjusting your strategy and ensuring you’re financially setup to succeed.