NEW YORK — The conundrum for small start-up firms is how to balance a creative design focus while still keeping an eye on operational details such as cash flow problems, which could derail a business — especially a smaller-sized one or a start-up.
The U.S. Small Business Administration noted that, on average, two-thirds of new firms survive at least two years, and 44 percent survive at least four years. Those averages were similar across different sectors. Some factors that determine a firm’s survivability include an ample supply of capital and sufficient staffing.
So what should apparel start-ups keep in mind as they grow their business?
“Don’t believe your own press,” warned Gary Wassner, president and a principal at factoring firm Hilldun Factors.
Hilldun’s clients are primarily designers running their own firms. He explained that many young entrepreneurs believe that they’ve got it made because they’ve been on the cover of every fashion magazine when, in fact, their work has just begun.
“Of course they must make sure they have the right fashion product, but they also need to produce the product according to the orders and the sample, and make sure that it all ships on time,” Wassner said. “It is hard to make a profit in the first season, and the designers have to make sure that they cost their goods properly. It doesn’t help to cost goods lower than they should be just to get into certain stores. What happens is that next season the customer will expect similar prices and it will be difficult to build profit later on into the product.”
Another point of advice from Wassner is that start-up firms need to “always, always, always watch their overhead. They have to run extremely lean businesses in the beginning. They should network as much as they can and farm out as much of the work as possible to keep the overhead low.”
Stanley Officina, president of Ultimate Financial Solutions LLC, also a factoring firm, said small start-ups need to understand that it is very important when approaching a lender to package their financial picture as they would their product.
“The packaging is the same as the fashion [component] when you ask someone to buy into the product line. The only difference is that it is now someone on the financial side that you are asking to buy into the company’s financial future,” Officina said.
Officina said one problem is that the entrepreneurs and the staff in sales, design and production don’t usually have any exposure to the financial side of the business, and therefore aren’t sure of what to consider.
“The financial operations are often an afterthought and the firms usually just jump right in and start paying money for sample lines and showrooms instead of working out a budget for the well-being of the company,” Officina said.
He added firms should have several professionals that they can contact on a regular basis, such as an attorney or accountant who understands the business of fashion.
In the U.S., small business is big business when it comes to the economy. Small businesses represent 99.7 percent of all employer firms, according to statistical information from the SBA. Data from the SBA also indicates that small businesses pay 45 percent of the total U.S. private payroll, and that they generated 60 to 80 percent of net new jobs annually over the last decade.
The federal government’s Office of Advocacy estimated that, in 2004, the most recent data available, there were about 24.7 million small businesses in the U.S., and that firms with fewer than 500 employees represented 99.9 percent of the 24.7 million small firms. There were 580,900 new firms created in 2004 and 567,200 closures in the same year.
Thom Browne, the 2005 CFDA/Vogue Fashion Fund award winner, who has operated his company for five years now, advised fellow entrepreneurs, “You do have to figure out how to become a good businessperson. Designing is the easy part because that’s what we all do. It is the business part of it that is challenging. But you also can’t spend too much time on business because you also need to focus on how to be a creative designer and learning the craft. While one should know how to run [his or her] own business, you can also find someone good to manage all that for you.”
A good first stop for someone looking to launch a business is to visit the SBA Web site, sba.gov. One section on the site tackles the financing of a start-up company. “In order to determine how much seed money you will need, you must estimate the costs of your business for at least the first several months,” the SBA suggests on the Web site. “Every business is different, and has its own specific cash needs at different stages of development, so there is no universal method for estimating your start-up costs. Some businesses can be started on a shoestring budget, while others may require considerable investment in inventory or equipment. It is vitally important to know that you will have enough money to launch your business venture.”