FINANCING AND CASH FLOW

Financing your new venture and making sure that there is a steady supply of cash to pay for everything from rent to employees, equipment, materials, and manufacturing is the next critical step.

“How are you funding this business? Who’s paying for it? Are you self-funding it from savings? Are you borrowing money? Do you have investors? All these things need to be considered at the start of a business and, again, should involve working with an accountant who can advise you on the basics of funding a startup,” says a SOURCING at MAGIC executive.

An established business may choose to work with a factor. Factors can help apparel manufacturers get through a particular season, agreeing to advance the business the equivalent of a season’s orders. For instance, if you have $100,000 in orders from retailers, the factor can front you the amount you’ll need to produce the collection, freeing up cash for other expenses. Keep in mind, the factor will charge interest on that loan.

Once basic financing is in place, it’s time to address costing product, so that the initial investment generates a steady profit.

UNDERSTANDING THE TARGET CUSTOMER AND WHERE TO PRODUCE

Several basic questions should be answered in the business plan, including:

*Where is the product positioned in the market?  (e.g., luxury, fast fashion, etc.)

*Who is the competition?

*Who is the customer? Are you targeting the retailer or going direct-to-consumer?

Answering these questions informs the target price point. Once that’s established, it makes it easier to decide where to produce. Cost will drive the quality of goods, e.g., the higher the quality of a product, the more it will cost to make. Making a high-end luxury offering will require specialized skills and exceptional materials that add to the bottom line. A more value-oriented product may be produced using automation and more commonly available materials, bringing the cost down. Different manufacturers, different countries, and even different regions specialize in making products for these diverse parts of the market. (Check out our SOURCING at MAGIC Country Guide Library for guidance on specific nations’ specialties.) Visit SOURCING at MAGIC to connect with manufacturers at all levels and to get a firmer handle on how much it will cost to make your product.

PRODUCT DEVELOPMENT/PROFIT MARGINS/SALES

Once you have bids for production, those rudimentary figures are used to set up a pricing structure that allows for a profit. Profit margin is the term used to describe the difference between what the product finally sells for, and the amount paid to produce and sell it. Options include selling direct-to-consumer (DTC) on your own website or in your own store, wholesaling the collection to retailers, or both.

In wholesale, allowing retailers to make a profit on the sale must also be incorporated into the cost. (Remember that working with retailers can introduce your product to an established customer base without list-building and expensive consumer marketing.)

"I always recommend incorporating a wholesale pricing model from the beginning. This strategy keeps the door open for potential retail partnerships while maintaining a healthy margin for your brand. If you later choose to pursue direct-to-consumer sales, you won't need to raise prices that could alienate your existing customers," says a SOURCING at MAGIC Buyer Relations Specialist.

Will you work with agents, regional salespeople, or other intermediaries to sell your product? Those expenses also need to be built into the pricing structure. Include a marketing budget: a DTC business must invest in lists to build an audience. A wholesale brand may be asked to contribute co-op money to its retailer clients; e.g., a percentage of sales to help the store support its own marketing efforts. And finally, be aware that products that do not sell will get discounted, adding further pressure to that profit margin.

RETAIL MATH

Markup is the term the fashion industry uses to express the difference between a product's wholesale price and its final retail price. A common markup multiplier is 2.2x, meaning if a retailer purchases an item at wholesale for $1, the Manufacturer's Suggested Retail Price (MSRP) would be $2.20. This markup allows retailers to maintain profitability while accommodating periodic discounts or "markdowns."

TECH PACKS

We discussed Tech Packs in Sourcing 101. For fashion industry sourcing professionals, Tech Packs are the basic building blocks of any product, providing a sketch and all specifications for how the garment will be produced. We bring those up here because the data in the tech pack will also provide critical information for our next step, creating line sheets.

LINE SHEETS

A line sheet is like a tech pack for sales. It provides all the relevant product details that a retailer needs to know to decide which product to buy and how many. A typical line sheet includes, by style: 

*A sketch or photo of the product

*Available colors

*Size range

*Wholesale pricing vs. MSRP

A line sheet may also include information about whether a minimum order is required, when orders are due, and whether or not this product will be included in an in-stock program. 

TAKING YOUR PRODUCT TO MARKET

Once the customer has been identified, figuring out where to go to market should be clear. If you’ve chosen a direct-to-consumer model, you probably have a good idea of the aesthetic that your website or store will present. You know where a store will be located. Wholesale brands will know where their customers shop so they can target the appropriate retail buyers and/or trade shows.

FINAL TAKEAWAYS

Here are a few basic rules to keep in mind when developing the brand’s cost structure:

*All prices must cover costs.

*The best and most effective way of lowering your sales prices is to lower costs.

*Your prices must reflect the dynamics of cost, demand, changes in the market, and response to your competition.

*Prices must be established to assure sales. Do not price only against a competitive strategy, you must price to sell.

*Product utility, longevity, maintenance, and end use must be judged continually, and target prices should be adjusted accordingly.

Bringing a new fashion brand to life requires more than just a great idea — it demands careful planning, expert guidance, and a clear understanding of the market. From legally establishing a business and protecting intellectual property to managing cash flow, choosing the right production strategy, and developing a pricing structure, every step is critical to success. By combining creative vision with sound business practices, while leveraging the expertise of accountants, lawyers, and industry professionals, aspiring fashion entrepreneurs can turn their ideas into profitable, sustainable ventures. Rely on SOURCING at MAGIC for connections to great manufacturing and technology resources, but also for the knowledge and inspiration entrepreneurs need to navigate this challenging journey. Make plans now to attend SOURCING at MAGIC Las Vegas, February 10 to 12, 2025.

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