Fashion. An ever evolving, highly dynamic and hugely competitive industry. The modern world of fashion ecommerce is one of strategic warfare with brands fighting for every minute advantage they can get over their competition in order to stay front of mind with the spoilt-for-choice consumer.
One, often overlooked, way in which fashion brands can differentiate themselves is through having access to working capital. In addition to accessing working capital, fashion brands also need to know how to effectively manage, bolster and use their working capital to their advantage.
As such, we have put together this article where we’ll explore the importance of working capital for scaling fashion brands and how you can maximise efficiency and profitability by effectively managing your working capital.
What is Working Capital?
Before we dive headfirst into the importance of working capital, let’s define what it is.
Working capital is the difference between a company’s current assets and its current liabilities. In simpler terms, it is the amount of money a company has available to cover its day-to-day operations.
Working capital is essential for businesses of all sizes, but it is especially crucial for scaling fashion brands. As your business grows, so do your expenses. You need to have enough working capital to cover these expenses and continue to operate at your desired speed and grow your business at your desired rate.
The Importance of Working Capital for Scaling Fashion Brands
In an industry defined by rapid change, agility is paramount. However this agility is under threat without appropriate and timely access to working capital. Some of the most crucial reasons working capital is so important to scaling fashion brands are:
- Cash Flow Management: Working capital allows you to manage your cash flow effectively. Without enough working capital, you won’t be able to cover your expenses or continue operating at the speed in which you would like to
- Flexibility: Having a healthy amount of working capital gives you the flexibility to take advantage of opportunities as they arise. For example, if you come across a great deal on fabric or materials, you can purchase them without worrying about the ramifications to your day-to-day operations.
- Reactivity: Both in product and marketing terms, the fashion industry is highly susceptible to trends. With trends often going as fast as they appear, it is important to be able to be able to reach quickly whether that be through product line development or through reactive marketing. Both of which cost so having working capital availability allows you to be able to move at appropriate speeds and remain competitive.
- Marketing and promotion: Beyond reactive marketing, working capital is a vital component for effective marketing and promotional activities. Readily available working capital allows brands to create awareness, engage potential consumers, drive sales and retain customers.
- Inventory and supplier management: While it may sound obvious, working capital enables fashion brands to invest in and manage inventory effectively, ensuring a constant and varied supply of products to meet consumer demands. Additionally, it helps with timely payments to suppliers fostering strong relationships, securing reliable sources for materials and components, and potentially leading to better terms and discounts.
- Seasonality: The fashion world is highly seasonal and many brands experience fluctuations in demand. Access to working capital allows brands to navigate these peaks and troughs and enables them to adjust production, inventory and warehousing accordingly or weather the storm until high season re-emerges.
- Growth and Expansion: As your business grows, so will your appetite to push the boundaries of product ranges, marketing spend and geographical coverage. Therefore you will need to invest in new product lines, new equipment, hire more employees, increase warehousing or 3PL partners and expand your other operations. Working capital allows you to do this without putting too much unnecessary strain on your finances.
- Survival: In the highly competitive fashion industry, having enough working capital can be the difference between success and failure. With enough working capital, you can weather any unexpected challenges or downturns in the market.
These are some of the reasons why a multitude of the world's most exciting fashion brands such as SPOKE, PANGAIA, Hedoine and more have turned to Uncapped to address their working capital needs and help them achieve growth at their desired rate.
How to Maximise Efficiency and Profitability with Working Capital
It is all very well and good having the working capital available, but how can you get maximum return from it and maximise efficiency and profitability of your working capital.
Below we have listed our top 6 ways in which your brand can put the word ‘working’ into working capital.
1. Implement robust financial and cash flow management systems
The first step to effectively managing your working capital is to monitor your cash flow regularly. This means keeping track of your income and expenses and identifying any potential cash flow issues before they become a problem.
You can use accounting software or spreadsheets to track your cash flow, but it’s important to review and update your records regularly. This will give you a clear picture of your financial health and allow you to make informed decisions about your business.
2. Negotiate supplier payment terms
As a fashion brand, you likely have several suppliers that you work with regularly. Negotiating payment terms with these suppliers can help you manage your working capital more effectively.
For example, you can negotiate longer payment terms or discounts for early payments. This will give you more time to pay your suppliers, allowing you to hold onto your cash for longer and improve your working capital.
3. Optimise your inventory management
Inventory management is a crucial aspect of working capital management for fashion brands. Holding onto excess inventory ties up your cash and can lead to cash flow issues. On the other hand, not having enough inventory can result in lost sales and missed opportunities.
To maximise efficiency and profitability, you need to find the right balance. This means streamlining your inventory management processes and using data to make informed decisions about your inventory levels.
4. Consider Alternative Financing Options
If you find yourself in a cash flow crunch, there are alternative financing options available to help you manage your working capital. For example, Uncapped’s purpose built lending product built specifically to address the needs of scaling fashion brands.
With Uncapped’s fashion specific product, you can:
- Fund your orders, not invoices
Traditionally, lenders can only fund invoices issued on already shipped goods. We know you need capital earlier to cover the full production cycle which is why we fund your order book, allowing you to finance your production from the very beginning and gain that much needed momentum.
- Finance 100% of your production costs, up to $5m
We can finance up to 100% of your production costs, up to $5m - enough for you to generate tens of millions of revenue each season.
So get in touch today to see how we help your brand to dispel with those working capital woes and set you on the path to exponential growth and success.
5. Leverage technology
Technology can be a powerful tool for managing your working capital. There are several software solutions available that can help you track your cash flow, manage your inventory, and make informed decisions about your finances.
For example, you can use inventory management software to track your inventory levels and make data-driven decisions about your purchasing and production processes. You can also use accounting software to track your cash flow and manage working capital and your wider finances more efficiently.
6. Diversify sales and marketing channels
Diversifying sales and marketing channels is pivotal for enhancing a fashion brand's working capital efficiency. By expanding beyond traditional outlets and embracing e-commerce platforms, social media, and collaborations, brands can tap into new customer bases. This not only amplifies revenue streams but also mitigates risks associated with dependence on a single channel.
Moreover, a diversified approach enables better adaptation to market trends, reaching diverse demographics. Enhanced visibility and accessibility translate into accelerated inventory turnover, reducing holding costs and optimising working capital.
Ultimately, the versatility of multiple channels fortifies a brand's financial agility, fostering sustainable growth and resilience in the dynamic fashion industry landscape.
Real-World Examples of Working Capital Management for Fashion Brands
Let’s take a look at two real-world examples of fashion brands that have effectively managed their working capital to maximise efficiency and profitability.
Rent the Runway
Rent the Runway is a fashion rental company that allows customers to rent designer clothing and accessories for special occasions. The company has been able to scale and grow its business by effectively managing its working capital.
One of the ways Rent the Runway has managed its working capital is by negotiating payment terms with its suppliers. The company were able to extend its payment terms from 30 days to 120 days, allowing it to hold onto its cash for longer and improve its working capital.
Stitch Fix is an online personal styling service that uses data and algorithms to curate personalised clothing recommendations for its customers. The company has been able to scale its business by effectively managing its inventory levels.
Stitch Fix uses data to make informed decisions about its inventory levels, ensuring that it has enough inventory to meet customer demand without holding onto excess inventory. This has allowed the company to improve its working capital and maximise efficiency and profitability.
Working capital is a crucial aspect of financial management for scaling fashion brands. By effectively managing your working capital, you can improve your cash flow, have the flexibility to take advantage of opportunities, and grow your business.
By monitoring your cash flow regularly, negotiating payment terms with suppliers, streamlining your inventory management, considering alternative financing options, and leveraging technology, you can maximise efficiency of your working capital and therefore increase profitability and take your fashion brand to new heights of success.
If working capital concerns are keeping you up, get in touch today and let’s see how Uncapped can help.