How to Create a Cash Flow Forecast for a Clothing Business
Whether you’re starting or you already have a clothing business, one thing which is often overlooked is the financial forecasting aspect of it.
When I started my journey into fashion and business, I ignored this crucial aspect of starting any business.
I started saving the majority of my money in case I had to pay a big unexpected expense instead of reinvesting my money back into my business to grow.
This meant I stunted the growth of my own business! I could have done one thing to prevent this… create a financial forecast.
If I knew what costs were going to hit me and when, I could have used my capital more wisely and still been prepared for the unexpected.
In this article, I’m going to be covering how to create a cash flow forecast for a clothing business. I’ll cover the key areas with examples of their significance in a clothing business.
Then, step by step, I’m going to build a cash flow forecast!
Alternatively, you could be here looking to start your own clothing business. I wrote an article detailing both how to start a clothing business and my experience in doing so.
What is a cash flow forecast?
So, what is a cash flow forecast and why do I need to make one?
A cash flow forecast is a way of predicting what cash is going to be coming in and leaving your business over a time period. It can be based on historical data (if it is available), competitor research and market research.
Creating one equips you with the knowledge to prepare for and effectively handle a variety of different scenarios which could arise in the future.
At its simplest, these “what-if” scenarios could be things like: What happens if you make a large cash purchase of an asset one month, leaving you without enough cash to pay your forgotten tax bill next month? However, there is no limit to the questions you can ask with a cash flow forecast
A cash flow forecast helps you to make decisions to ensure predicaments like these don’t arise.
It is also often a requirement for funding applications to banks and investors.
If you already have investors, then they may want to see your actual cash flow against your cash flow forecast to see where reality differs from your predictions.
With those questions answered, let’s go through the main parts of a cash flow forecast. There are 4 main areas we are going to be focusing on in this article:
- The length of time you’ll forecast for
- How many sales you’ll make
- When you will receive payment
- How much your costs are
Let’s break down these areas in a clothing business.
How long should your clothing business cash flow forecast be?
A forecast could be anything from 1 week to 10 years or more!
The shorter the forecast the more accurate it will be. However, you lose the bigger picture.
The longer the forecast is the more strategic you can be. However, the further you forecast ahead the harder it becomes to predict plausible finances, particularly sales.
As I covered in the last section, a cash flow forecast is a way of predicting cash in and out of your business. So, a cash flow forecast should be long enough to base decisions on effectively.
The length of time people forecast usually depends on the reason for creating it in the first place.
You might create a short term forecast for a few months ahead to help you get through a difficult period.
If you are creating it for acquiring funding, then you may have to forecast upwards of 3 years.
A 1-2 year forecast is an excellent way of viewing your clothing business. This period of time is long enough to consider how my short term decisions might impact my longer term goals into the following year.
I also highly recommend a 2+ year forecast if your sales are highly seasonal. You need the extra room to see if sales from the season will be enough to cover your dry period up to the next season.
The income streams of a clothing business
Since you’re a clothing business, you’re going to be selling, well… clothes.
If you have an existing clothing business, you should already have an understanding of your average weekly or monthly earnings. When you have existing data, your job is to identify the factors in the coming months that could modify your historical results.
However, if you don’t have any figures, how in the world are you meant to come up with figures to forecast with?
There are other ways of obtaining figures for forecasting (and no, you’re not pulling them out of thin air).
Methods such as market and competitor research will help you come up with your prices.
A good place to start is to do some research into other businesses who sell similar products to yours.
So, for example, if you want to sell tie-dye t-shirts, then you can search that on Google.
It’s good to take a wide variety of competitors into consideration. You may see a large, highstreet store sell a tie-dye t-shirt for £6 and a small, online store sell a similar one for £15.
Evaluation of the value of your products can often be determined through materials, labour associated, and complexity of the designs.
Now we just need to figure out how many products we are going to sell.
Unlike the price of your products (which you can choose), there is no guaranteed way to know how many sales you’ll have.
Creating your first sales forecast could take the space of this entire article, it’s a big topic. The way to get started is similar for many types of startups though.
You need to consider:
- What marketing activities are you going to undertake to gain your first customers?
- What are your realistic targets for these marketing activities?
- How confident are you in achieving those targets?
Once you have researched this information, you should be able to start creating estimates for the units you’ll be able to sell on the back of these activities.
You can run base, best and worst case sales scenarios to help explore what is possible. The range between the best and worst case will be informed by your confidence levels in hitting your targets.
Let’s start to breakdown some income streams for my example clothing business:
- T-shirt Prints A
- T-shirt Prints B
- Hoodie Prints A
- Hoodie Prints B
- Beanie Prints
You may be thinking, “why have you broken them down individually”? There are two reasons for this.
Firstly, breaking down streams of income provides better control over forecasting the individual income streams, as well as better tracking and understanding of the income in the future.
For example, if T-shirt Prints B isn’t selling as well as T-shirt Prints A , then I can handle that situation by changing the design, removing the product etc.
Secondly, it allows me to forecast the costs associated with selling each individual product. The cost of sales associated with Hoodie Prints A is going to be greater than Beanie Prints A. So, what are the costs of a clothing business?
A key factor which you need to take into account when thinking about your sales is when you will actually be paid.
Depending on the type of clothing business you have, this can widely vary.
If you’re selling t-shirts with custom prints online and shipping them directly to the customer, then you’ll receive the money at checkout.
However, if you’re a private contracted artist who’s hired to create something unique, then there will likely be a multi-stage billing process to cover materials, labour, fittings etc.
This is important to take into consideration when you’re forecasting your sales. When there is a difference between the timing of a sale and when you receive the cash, it can have big ramifications on your cash flow.
If you just focus on your sales figures and not the actual cash coming in, that’s when you can run into trouble!
It’s another reason a cash flow forecast is important.
What are the costs of a clothing business?
There are several different types of costs associated with a clothing business and it depends on how your clothing business will operate.
However, in this section, I’m going to break this down into two sections. Startup and Running costs.
It is crucial to know how much money you’ll need when starting your own business.
Startup costs for a clothing business depend if you’re making the clothes yourself or not.
If you’re looking to create all your clothing in-house, then you will need to have all the equipment and inventory to start making clothes.
However, if you’re looking to outsource your production, then your startup costs will decrease.
In my example clothing business, I’m going to be making my clothes in-house. So, let’s list off my startup costs:
- DTG Printer (Direct to Garment)
- My initial Inventory purchase (20 T-shirts, 10 hoodies and 15 Beanies)
These costs cover my initial inventory and asset purchase, meaning I can make my first batch of clothing.
Just bear in mind your startup costs and your running costs may be similar if you have recurring costs like inventory.
Now we’ve covered our startup costs, let’s cover our running costs.
Your running costs will include costs associated with selling your product (Cost of Sales) and other operational costs to keep your business running.
Your cost of sales may include:
- Inventory purchases (T-shirts, hoodies and beanies)
- Shipping and Logistics
- Printer Ink
Your operational costs may include:
- Insurance payments
- Utility Bills
- Salaries (if you have staff)
As these are costs related to creating and delivering your product to the customer, Cost of Sales scale with your income. Therefore, the more money you make, the more costs you have to pay to keep up with demand!
Creating a cash flow forecast for your clothing business.
So far in this article, we’ve covered the importance of creating a cash flow forecast, how long it should be and what it should contain. Now, all that is left to do is create one!
In this section, I’m going to be creating a cash flow forecast from scratch using Brixx! If you’d like to follow along, you can start a sign up for free, or you can download our free cash forecasting template.
Let’s get started!
Section 1: Creating your plan
Here is the plan creation screen:
Here you have the options to change plan length, start date, tax system and currency. I have set my plan to forecast 3 years, with VAT turned on and in Pound Sterling.
Let’s build a cash flow, simply click “Create plan”.
Section 2: Income and Cost of Sales
So, I’ve got several products I’m selling:
In the image above, you can see the structure of my products. As I spoke about earlier, I split out my products so I can manage each income stream better as well as costs associated with them.
If I introduce more products later, I can continue to break them down in the same way and even add them into separate product groups if required.
Through my market and competitor research, I have come up with my first month of income figures:
- T-shirts A = I expect to sell 10 a month at £15 each
- T-shirts B = I expect to sell 10 a month at £15 each
- Hoodies A = I expect to sell 5 a month at £30 each
- Hoodies B = I expect to sell 5 a month at £30 each
- Beanies = I expect to sell 15 a month at £10 each
Now I have my figures, I can enter them into Brixx!
This is my “T-shirts A” Income component. As you can see, I expect to sell an additional 2 units every month.
I can now save this and enter in my other income streams.
As my payment terms are “Pay at Checkout” I receive the money immediately to ship my products!
Cost of Sales
Now I have all my income streams down, let’s add the costs associated with selling my products.
In this screenshot, you can see all green components are my income, all red components are my costs, and all yellow components are my inventory. They are linked to each income forecast so that they can calculate costs based on my sales forecast.
The Cost of Sale components represent the costs of shipping my products to my customers. Let’s have a look inside:
Through some research, I have concluded that it roughly cost me £3 to package and ship a t-shirt to a customer.
Now, let’s look at the inventory component:
After doing some research into buying t-shirts in bulk, I calculated that an individual t-shirt will cost me roughly £5.
Inventory is also considered as a Cost of Sale as it directly relates to the sale and creation of the product.
I mentioned earlier that Costs of Sales will scale alongside your sales. Brixx automatically does the scaling for you!
In the example below, I am purchasing inventory each month to match my sales predictions.
Alternatively, it’s also common to purchase inventory several weeks or months in advance of your sales. This might be to ensure you have stock to fulfil all demand swiftly but also because you might get bulk discounts from suppliers.
Bulk buying inventory in this way has a large impact on your cash flow which you definitely need to plan for. You will be spending money well in advance of receiving any income, so plan carefully!
Here is my cash flow so far. This includes my Income streams, Inventory and other Costs of Sales. Time to tackle Operational Costs!
Section 3: Operational Costs
Operational costs are usually fixed costs and therefore can be easily forecasted.
Let’s pop my list of Operational costs from earlier into Brixx.
Here are my Operational Costs. These costs are fixed costs which won’t scale with my sales activity.
These recurring costs are usually paid monthly, quarterly or annually. Let’s have a look inside:
My insurance is £80 per month. If you’re interested in the types of insurance a clothing business needs, I recommend reading the insurance section in how to start a clothing line from scratch.
To summarise, here are my operating costs:
- Electric = £30 Per Month
- Gas = £20 Per Month
- Internet = £30 Per Month
- Water = £20 Per Month
- Insurance = £80 Per Month
- Rent = £2500 Per Quarter
- Social Media Ads = £80 Per Month
- Website Hosting and Management = £20 Per Month
I have decided to pay all my costs on a monthly basis (with the exception of Rent) as this helps spread my cash spend meaning I don’t have large amounts of cash leave my business all at once.
If you have employees, this is where their costs would sit. If you don’t have employees yet, It’s good to plan for them as you may have to take on your first employee during a period of high sales or if you want to grow your business!
Now, let’s have a look at my cash flow again:
As you can see, all my Operating Costs have been entered into my plan, and are displaying in the Operating Activities section! We’ve nearly finished creating our cash flow forecast. Let’s now move onto adding our assets.
Section 4: Assets
Whether you’re producing your clothing in-house or externally will determine what assets you purchase, and how you purchase them.
As I spoke about earlier, if you’re producing your clothing in-house, then your assets purchases are going to be higher than it would be if you were to use the service of a third-party company.
There are different payment terms for purchasing assets.
Purchasing an asset in full means that you can spend a large amount of cash all in one go, but you own the asset outright.
However, if you are eligible to purchase the asset on credit, you can gradually pay off the price over a period of time. Bear in mind, if you are facing a period of financial trouble, then you may not be able to afford the repayments.
For my clothing business, I’m going to be making one large cash purchase for an asset – a printer.
This printer will print my designs onto my items of clothing for sale. It costs me £1,500.
So let’s enter that into my plan!
Here, I have set up my printer to cost £1,500 with VAT paid on top. I have also set a 10% depreciation rate so it loses value every year due to general use.
Let’s look at our cash flow:
So we’ve covered Income, Costs and Assets. Let’s move onto the last section, funding.
Section 5: Funding sources
Last but definitely not least, we need to think about funding.
Funding is always relevant whatever stage your business is at. When you are just starting up, you might need it for your first inventory purchase.
If you are already well established, it’s still highly relevant for boosting your expansion plans and filling in gaps in your cash flow.
There are different types of funding. Earlier on, we spoke about how creating a cash flow forecast can be used to obtain funding from investors and banks.
However, putting your own money into your business is also considered funding.
It’s good to think how you want to obtain funding for your business as early as possible. This will allow you to weigh up the pros and cons of each type.
It will help you to make the decision if you want to save up and use your own money, or owe the bank or an investor a large sum of capital.
For my business, I’m going to obtain a loan of £1000 from my bank, and invest £2000 into the business from my own pocket.
So, let’s put this into Brixx!
So we have a Loan component which represents the money issued to me by my bank, and a Capital component which is the money that I have invested.
Let’s look inside my loan component:
This Loan component is set so I receive £1,000 in December, and pay off the loan + 10% interest over a 12 month period.
Let’s see how this appears on my cash flow!
Now I have entered everything I need into my plan, I have the foundation of my cash flow finished!
Next I want to visualise my numbers through graphs and charts.
It can be hard to comprehend numbers and translate them into understandable scenarios.
By visualising your cash flow, you can see the exact dates when costs happen, cash is available and any unwanted scenario may arise.
Luckily, Brixx has a built in Dashboard which automatically does all the hard work for me. Here’s what mine looks like:
Taking your next steps
Congratulations! You’ve completed the first steps towards forecasting your clothing business! However, you’re not done.
Although you may have created a cash flow now, your business will grow, change and develop over time.
This foundation is your starting point for exploring scenarios into the future. What is the most effective way to spend my money to grow my business? When can I do it safely? My cash flow forecast can help find the answers.
Forecasting regularly is so important.
A cash flow forecast is something which should be created, tweaked and managed periodically. It’s a helpful crystal ball to peer into your business’ future.
When your business grows, your cash flow will too. This means you may have to re-evaluate your decisions and take into consideration different scenarios:
- Do I have enough cash for inventory purchases if my sales sky-rocket?
- Can I afford to hire a new staff member?
- What happens if an expensive piece of equipment breaks?
- When can I move into a larger working space?
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