Crunching the Numbers…
At this stage in the game I am crunching the numbers to ensure that I will not be working for free and actually have a viable business plan. A couple of resources that I am using to assist in this process are the book Fashion For Profit by Frances Harder and information from a seminar I went to held by Mercedes Gonzalez, owner of Global Purchasing Companies.
Unfortunately, at this point many of the numbers are estimates because I am not sure of many of the costs involved such as fabric cost, manufacturing cost, shipping, etc. What I do know is the final price point that I want my garments to retail for. I also know that the standard markup retailers implement ranges from 2.2-3.0, boutiques typically being around 2.3. Now I have enough information to calculate the basic cost of a garment (how much it should cost to manufacture). The costing formula I am using is as follows: Retail Price/Markup=Wholesale Price/3=Basic Cost. The Basic Cost lets you know how much you can spend to manufacture a garment at a particular retail price and still make a profit. I still am unsure of this formula because I am not sure exactly what the Basic Cost includes, so I am still investigating this topic.
Obviously there are many other factors that need to be included when calculating your garment cost. These include the fixed costs (general & administrative) as well as variable costs such as sales and marketing. Also, don’t forget to account for nonpaying customers, chargebacks and returns. These should be calculated into your garment as part of the chargeback calculations and can be estimated at 6-8%. It’s a pretty daunting concept that all of these costs are applied to a garments with a wholesale price of $30-$65. However, considering that the costs are spread over hundreds or thousands of garments it becomes feasible.
I have been advised that a good rule of thumb is to ensure your gross profit margin does not fall below 35%. At this point you will still be able to make money, which of course is one of the reasons I have started this business!
Kristin Potenti, Self Assured
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August 11th, 2008 at 2:14 pm
It seems that number crunching at this early stage is one of the most daunting action items for a new entrepreneur. I’ve seen it paralyze the launch of a new business as the hesitation over being a prognosticator is just too overwhelming.
You don’t have to be perfect in your cash flow projection. You just have to be diligent about staying on top of it and making adjustments to the formula as you move forward and learn new, real, live market info.
Way to go Kristin!!
August 13th, 2008 at 10:53 pm
You wrote: “don’t forget to account for nonpaying customers, chargebacks and returns. These should be calculated into your garment as part of the chargeback calculations and can be estimated at 6-8%”.
These costs are not inevitable; I know exactly who said this and while she’s an indisputable authority and I wouldn’t go to anyone else if I wanted to open a retail store, she’s not an authority on manufacturing. She orients designers into accepting -at face value- the cost and trade policies that are most advantageous to her core customer -who just happen to be retailers. Here are some things that buyers don’t want designers who are just starting out to know:
1. You can get paid before you ship. Tons of people (buyers, factors and retail consultants) will tell you can’t but it’s not true. Most of my designers get most of their money up front. They complain about a lot of things but getting their money isn’t one of them. Heck, some people are getting deposits from buyers before they even cut the goods.
2. You do not have to accept product returns at the end of the selling season. The audacity of some people! If it’s advantageous for you to accept the return (need to fill some reorders from other customers) then sure, be magnanimous. Otherwise, tell them to take a hike! Again, sure, they’ll tell you everyone else takes returns but head them off at the pass and cut them loose.
3. Chargebacks. Seriously? From an independent store? Because you definitely don’t want to sell to a big box retailer at this point and the latter is too far off at this point since you have so much to do in getting the line together. Sure, you want to make your customers happy so you should adopt vendor compliance standards that exceed their expectations but if a indie store wants to levy chargebacks against you, you have bigger problems. It’s best to avoid problems by investigating the store to see their payment history, whether they bounce boxes etc. It’s not hard to get the low down.
Anyway, these costs are not absolutes. Spend your time worrying about things that are.