As well as monitoring your cash flow, you need to be aware of possible hidden costs. You have your business-plan document and yearly budget to help you control your expenses and running operations. You also need to be aware of costs that are not as obvious and may be unaccounted for. Let’s take a look at some expenses that are easily overlooked.
Dead stock
Check your inventory to see which products are slow-selling and which are not selling at all. You’ve paid for the production of the garments—dead stock means you’re losing money on them if they don’t sell. Create a strategy to get rid of the existing dead stock and to avoid it in the future.
Shipping costs
Samples are sent back and forth to factories; sample and production materials are sent to you as well as to the factory; bulk production needs to be shipped to warehouses and end consumers; e-commerce orders are sent to customers. All this shipping involves costs that easily add up to a substantial amount you need to account for.
Non-paying customers
Conduct credit checks of customers paying by invoice rather than cash. You want to be sure you get paid for your products and services, and if customers are not paying your bills it’ll hurt your business.
Discounts
Perhaps you work with discounts to increase your sales; e.g., it’s quite common for e-commerce sites to offer clients a discount when they sign up for a newsletter. This may work well for you—but remember to track all your discounts since you’re paying for them.
Adjustment costs
When working with product development, there are always details that need to be improved and adjusted. You need to agree with each partner what’s included in your collaboration and what’s not. After a couple of sample rounds, you may ask a factory to make pattern adjustments. Don’t assume they’ll do it for free. Expect an invoice for the pattern work or negotiate it.
Tolls
Depending on your location and where your suppliers are, you may have to pay taxes and tolls. Read up on the regulations before conducting business with new partners so that you can calculate and incorporate these costs in your budget.
Returns
Normally, returns will cost you the shipping, the lost revenue, the handling, and the administration. An unexpected increase in returns will take a toll on your profit. Talk to your customers and examine why they’re returning your garments. Use that information to create a plan to mitigate this issue in the future.
Surcharges
You may, for different reasons, decide to make a smaller production batch than you intended or received price quotes for. Usually a material supplier or garment manufacturer can make smaller amounts than their MOQs. In these cases you’ll be billed a surcharge. These surcharges will eat up your margin. This can be planned for and fit into your strategy, but remember that prices vary depending on order quantity.
Inefficient processes and systems
If you don’t have clear processes and systems in place for performing all the tasks in your business, it’ll cost you valuable time and hence money. With the right processes in place you’ll be more efficient avoid delays, double work, and costly mistakes. If you’re a small business, implement processes as if you were a large company. If you’re a large company, constantly evaluate and improve your processes.
Currency rates
As an apparel entrepreneur, you’ll likely be working with suppliers and customers in other countries. This exposes you to currency rates. Even small fluctuations in currency rates can add nasty costs for you. Pay attention to the currency when placing your orders and adjust your calculations accordingly.
Missed production deadlines
When creating your plan, you usually start by looking at your planned delivery date. You use that date together with known lead times to calculate backwards when you need deadlines for certain tasks. A missed deadline can easily incur added costs for you. An example is if you’ve planned to transport your garments by ship; a missed deadline could mean you won’t have time to transport the garments by ship, and instead have to opt for the more expensive alternative: airplane.
Sample costs
If you have to make more samples than you planned for, you’ll also have to pay more than expected. Avoid having to make extra samples by creating detailed, structured tech packs, BOMs, and measurement lists, as well as securing the correct materials and good references. Leave as little as possible to chance.
Factory visits
You should plan for at least one, but preferably more, factory visits during product development. Problems with prototypes, production, or communication will mean you’ll have to visit more than expected. These visits usually help to sort out issues, but they’ll also cost you in terms of travel expenses.
Sourcing
Sourcing means visiting fairs, factories, suppliers, and representatives. If you’re unhappy with a material or collaboration, you’ll have to start your sourcing over. This could mean new travel costs, more shipping expenses, etc. It’s a good idea to include a buffer in your budget for sourcing so as to avoid suffering elsewhere in your organization.