The Basics | Part 4 – How do I Decide Where to Allocate My Capital?

Source: Shutterstock

Source: Shutterstock

The fourth article in our BoF Basics series for emerging designers has been a long time coming. We have been receiving emails every other day asking when the next article would be published. So, here it is, and  thank you for your patience.

So you’ve done it. You’ve cobbled together some financing from family and friends or squeezed a loan out of your bank manager. If you’re a little farther along, perhaps you have managed to raise an injection of capital that will help take your business to the next level. The question is, now what to do with your funding? And, how do you make it last?

It’s likely that you will have had to agree fund allocation to some extent with your investors prior to securing the funds, but it will be important to re-visit and re-confirm this now that you are past the negotiation stage. In reality, you will make spending decisions every single day, how ever small. The fourth part of the BoF Basics discusses the allocation of your capital, or more simply, how and where to spend your money.

The easiest way to think about allocating capital is by using a series of principles. Allocating money is about tradeoffs, and making those tradeoffs means choosing between spending on things that might seem equally important, on the surface. For example, every fashion business will have to choose how much money to spend on building and shaping a collection and how much to spend on actually selling the collection. How do you make these decisions? By using the principles below combined with the priorities for your own business. The ultimate decisions may differ from business to business.

So here they are, the 5 principles of allocating money in an early-stage fashion business:

Key Principle 1 – Carefully manage product development costs

While fashion is a product business that often comes with exacting standards, it is still important to carefully manage your product development costs. Creating large, unfocused sample collections with very expensive fabrics can be a death knell for a young fashion company. Not only will you have spent a fortune on developing a set of samples, you may have also created a collection that could never sell at retail because it would be far too expensive. Always use a collection plan to specifically identify the size, structure and price points for your collection, and select your fabrics with this in mind. This way, you won’t need to buy a bit of everything and sort things out once you are back in your studio, wasting money and time all the while.

Key principle 2 – Advertising is a cash sink

As a young designer, you probably don’t need to spend money on advertising, and the expensive photo shoots and super slick branding that come along with it. You can still craft a very strong profile by building relationships with editors, journalists, photographers and fashion insiders who take an interest in you and your work, and may help you for free. Those relationships will not only generate valuable editorial, their impact will also be felt longer than even the best-placed one-page ad in Vogue. As a young designer, you have a new and interesting story to tell and people will want to tell it too — you don’t have to pay them for this privilege. Supplement this with a professional looking website that is in tune with your creative vision and a clear brand identity that speaks to who you are creatively.

Key principle 3 – Focus on growing sales

As a growing company, you will likely be best off allocating your capital to people and assets that help increase your revenues. While you must invest time and resources into your product, brand image and identity, it is crucial that you are able to then leverage this raw potential to sell. Even if you have a strong collection and a growing brand profile, this will mean nothing if you don’t have a professional sales organisation to support it. One of the first people you should consider hiring is someone who can help you with sales. Also, investing in an e-commerce portion of your website (or through a partnership) helps you to increase both sales and profits, as you begin to capture the full-retail margin.

Key Principle 4 – Don’t forget about working capital

Not all of your funding should be invested in fixed assets like sewing machines, office furniture and computers. You will also need funding to make sure you can counterbalance the difference between the cash coming into your business (e.g. from sales, sponsorship and consultancy) and the cash going out of your business (e.g. for fabrics, rent and salaries)  In a growing fashion business, the amount of working capital tends to grow quickly as payments for clothes delivered to stores are often not received until well after the designer has made significant investments in everything it takes to bring that collection into a store – a large part of this is a variable cost of fabrics and productions costs that will increase with time as your business grows.

Key principle 5 – Use a budget

It is absolutely essential that once you have thought these issues through, you create a budget to track your spending against your plan. Without this roadmap of sorts, you could lose control of spending and suddenly find yourself without enough money to keep your business afloat.  You should track your budget, at the very least, on a monthly basis, which means investing in a good bookkeeper to help you regularly track your accounts.

Next time: Value Chain – Design and Development

The design and development process is often a very personal one that differs from designer to designer. It is important to keep this process free and unrestrained to unleash the best ideas, but there are also things designers can do to stay on track and manage their time (and their team’s time) efficiently. For fashion business people in particular, understanding your designer’s creative process is a crucial part of a successful creative-business partnership, and so designers must also be able to explain to others how you work, in order that they can work with you.

This is the fourth in a series of articles on the Business of Fashion: Basics

• Basics 1 – Setting up your own fashion business – what do I need to know first?
• Basics 2 – What is a business plan for and how do I go about writing it?
• Basics 3 – How do I find the right investors and partners?
• Basics 4 – How do I decide where to allocate my capital?
• Basics 5 – Design and development
• Basics 6 – Sales
• Basics 7 – Production
• Basics 8 – Marketing
• Basics 9 – E-Commerce

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51 comments

  1. But where do you get the money to fund your business? There are no loans or grants that are out there? Where do you find the money when you have the idea and th plan?

    Tara Tillett from Crandall, TX, United States
  2. Any tips on actually setting up an e-commerce please?

    JRC from Sint-gillis-waas, 08, Belgium
  3. I have been following your blog for quiet a while now, but it wasn’t until now that I noticed this series of article. Thank you so much. I have been working on a business plan for some time now and this will definitely help me make it better. I hope you will post the remaining articles soon. I noticed that its already due over 6 months.

  4. hey there. i’m so glad that i found this website, please keep writing the rest of the articles, as i am planning on opening my own fashion house here in The Kingdom Of Bahrain, and i need alot of guidance. if there is anything that u could help me out with please feel free to email me.
    thanks
    regards
    Princess Fashion

    Princess Fashion from Bahrain
  5. Please, PLEASE indicate when the next articles will be posted…it is extremely valuable advice for those that are in the process of finalizing a plan to approach potential investors. Excellent journalism, much needed in an ocean of inaccurate and poorly sourced online blogging.

    Catherine from Liverpool, Liverpool, United Kingdom
  6. These are great articles!! What is the schedule for the release of these installments?

    Chris from Santa Monica, CA, United States
  7. I thank God for this website. I am 23 and I have a lot of goals that I know will come to past but I needed a little direction. I really love this website and I will remember it when I become famous. Please keep updating it and giving more advice!

    Dominique from United States
  8. Any advice for a forty-something yr old who has always been interested in the fashion industry? – Currently a marketing professional but not in the fashion industry. Have money for start-up and a vague plan but need my ideas and designs put into action..quickly!

    Nina from London, London, United Kingdom
  9. I just discovered this website and I am hooked…
    This segment is amazing for not just young designers but anyone wanting to start-up a business in fashion.
    Where are the balance of the sieres of articles, did you give up? I like your journalism skills, what and how you write things make lots of clear sense…thank you,
    Keep up the remarkable work!

    lino from Boisbriand, QC, Canada
  10. Hello,
    I am enjoying and learning with your articles…

    Do you have any advice for emerging designers who are not based in a fashion capital?
    Puerto Rico? Selling product internationally it is a struggle.

    thank you.

  11. Yes, I would love for you to continue this series. It has been very informative for me and I’m sure others. Please bring it back.
    Thanks! And I am a huge fan of this site
    -Vinise

  12. This is a wonderful series and very informative. When do you intend to complete it? Thanks

    Sunshine from Atlanta, GA, United States
  13. Thank you-The articles give insight on the entrepreneurial aspect of the fashion biz-I look forward to reading more informative and valuable articles.
    -Nilab

    Nilab from Toronto, ON, Canada
  14. Can’t wait for #’s 5-8!!! Great infomation!

    adriana from New York, NY, United States
  15. Thank you, thank you, thank you :)….when will the rest of the articles be online?

    Anad from Cairo, Al Qāhirah, Egypt
  16. Hi – if you want to sell fashion brands how do you find the wholesalers or manufacturers? It seems to be a lot more opaque than one would expect!

    Niamh from Halstead, Essex, United Kingdom
  17. Great articles and so helpful for those just starting off.
    My question is about when is the best time to try and sell your 1st collection. I have an idea of who I would like to sell to, and am assuming they buy in Feb and September after the main shows.
    Is this correct?

    Lindon from London, London, United Kingdom
  18. Great series, keep up the good work, but what about Basics 5-8?

    Nathan from Bridgetown, Saint Michael, Barbados
  19. Hi… when is the next article scheduled to be released? Would be great getting something back soon.

    Cheers

    Dee from Ho Chi Minh City, Hồ Chí Minh, Vietnam
  20. Where or how could I access the Basics 1, 2, and 3? I missed them. I am just finishing up a second course on Design and beginning to plan ahead. Good Stuff!
    Carol

  21. Loved the previous articles, but you lost me with this one. What do you mean by “professional sales organisation”? What is a “full-retail margin” and how on earth do you “capture” it? Do you need a butterfly net? Ok, I believe you that I need these things, but I’m reading this because I DON’T have a business degree. I’m not any the wiser after reading it.

    Helen from Caringbah, New South Wales, Australia
  22. Yes. it ‘s a really useful articles.

    Thanks. I felt really happy to find your articles as well. I am making my business plan now and I found your article. It ‘s really useful and I felt many same feeling and experiences as you said. So I felt I am in my way and working on right thing.

    So I will check your new articles and interested in what you are going to share with us next time and future.

    Really glad to read your articles.

  23. I am starting my own children’s desing clothing business. I found this very useful because somewhere along the way I got a bit lost, but now with your help, I can continue on the right track! Thank you for publishing this and I will read your other related articles!!

    Gaby from Coyoacán, The Federal District, Mexico
  24. Thanks B of F for a clear and honest piece. Fashion is a cash flow business, and managing and distributing dollars is a tricky business. Designers need all the help they can get. Good work.

  25. Great series! I was wondering when the next pieces will be up, the previous articals have really helped me. I am eagar for the rest. Cheers

    Jose from London, London, United Kingdom
  26. when is basics 5, 6, 7and 8 coming out? or is there a ink where i can browse it? I realize this article was written in 2007. i would really love to read the enitre series.

    niki from Jakarta, Jakarta Raya, Indonesia
  27. Very insightful and useful information! Please tell us when are you writing articles 5-8? It’s been 4 years since this one! I think we’ve waited long enough and are very anticipated to see what comes next! Thank you~

    Lily from New York, NY, United States
  28. It would be great if these series are completed

    An from Den Haag, South Holland, Netherlands
  29. I am a mensweaer designer , I want to set up my business as an image consultant . I dont know how to struture my services and pricing. Rob Hotz (south africa)

    robert hotz from Pretoria, Gauteng, South Africa
  30. Very helpful information!!! Does anybody know where to find
    • Basics 5 – Value Chain – Design and Development
    • Basics 6 – Value Chain – Marketing and Sales
    • Basics 7 – Value Chain – Production and Supply Chain
    • Basics 8 – Value Chain – Retail
    Thank you!!!

    Ir from Ukraine
  31. Uh oh… 4 years since this post. I hope this doesn’t mean that your tutorial is stalled forever. I really appreciated the first 4 articles. Thank you.

    Lisa from Singapore, Singapore (general), Singapore
  32. seriously, i have just started writing a business plan… i stumbled upon these articles and i am so disappointed that they ended so abruptly..
    ….:(

    jane from Johannesburg, Gauteng, South Africa
  33. Very helpful series for a fresh graduate like me. Thanks so much BoF! It’s a shame they don’t teach this at university. Please please post the next article! I’ve been waiting patiently!

    Aishwarya from Mumbai, Mahārāshtra, India
  34. plzz post other articles on business basic..

    vaibhavi from Mumbai, Mahārāshtra, India
  35. wow. Am an ucoming fashion designer who was really finding difficult in how to put up a business plan and why. This is really a great help to me. thanks BOF.

  36. Imran Amed if you haven’t done it already please start writing your book. Your clear precise knowledge of fashion information is extremely valuable to us new fashion entrepreneurs. Please give us series 5-8. Has anyone been able to locate the other 4 articles?

  37. Hi Imran,

    Your articles on starting a fashion business has been realllly helpful. Thanks for that! So now, any chance that you would complete the series from 5 – 8….?

    Ogor from Nigeria
  38. I agree with comments above. A very useful articles. Patiently waiting for remaining 5-8 basics. Thank you for your hard work.

    Maya from Montreal, QC, Canada
  39. What happened to this series? last article posted in 2007??????

    Fiona from Strathfield, New South Wales, Australia
  40. Thanks very much for these series. They covered the basics and were easy to follow. What’s with the gap since 2007?

    Veronica Simpson from Portmore, Saint Catherine, Jamaica
  41. Helpful information.But it seems like the links to articles 5 – 8 are not meant to be accessed.Honestly it will complete the knowledge if we can access the rest articles.More grease to your elbow.

    Francis

    francis from Enfield, Enfield, United Kingdom
  42. i really like the articles,its has help me with the basis information i needed to set up my Fashion business.i wish the remaining articles will be out soon.
    Thanks so much!!!!.

    Damilola mercy from Nigeria
  43. I’ve been reading this plans since 3am. Thank you so much as we are wait the next post. This is more than helpful, more grace to your elbow.

    Temi from London, London, United Kingdom