One more thing before you get started on the fun part of your clothing line - get your accounting and bookkeeping in order. The earlier the better. Believe me, it's a nightmare when tax season rolls around and your books are a mess. The easiest way to keep your financials stress free is to keep track of them in real-time. If you are just getting started, or even if you are an established brand that always seems to find themselves in a panic around tax time, try these fashion accounting tricks to make your clothing line finances easy.
Bookkeeping vs Accounting
What Is Bookkeeping?
Bookkeeping can be easy if you commit to doing it every day. Or, at least once a week. The goal of bookkeeping is to keep a detailed report of your companies daily transactions. Not only does it make your accountant's life easier, but it also gives you critical data about cashflows, which are necessary to make sound business decisions.
Without a good understanding of your books, it is easy to slip into debt with all the little start-up expenses.
Think of start-up expenses like going to Target. You walk in not needing anything, grab a bunch of items that "cost nothing", and leave the store with a $300 bill. That's what happens with start-up expenses. They seem small, but add up really quickly.
The first year I founded virtue + vice I did zero bookkeeping. And, when tax time came around it was a total shit show. I was in India in a village that had like zero cell service, literally was on a roof trying to get reception, my accountant was in New York asking me a million questions I did not have the answers to while he scrambled to get all my filings done on time. And, my boyfriend/business partner was furious that I had been keeping zero records and we had to rush like crazy people at the last minute.
I learned my lesson the hard way. Keeping track of business expenses in the fashion industry is a lot different than personal taxes every year. So, please learn from my mistakes, take my advice, and take bookkeeping seriously.
By year two I hired full-time bookkeeping services to keep track of my invoices, expenses, payments, and to prevent future issues.
I am going to teach you how to DIY your own bookkeeping. But, if you feel like you want to hire someone, email me for a few amazing recommendations.
What Is Accounting?
Accounting is a lot more in-depth than bookkeeping. While accountants are great during tax season. They can do even more than just your yearly taxes. The offer services like strategic tax planning to save you money long term, and financial forecasting if you are starting to think about investors and what type of capital is needed for growth.
Personally I use QuickBooks. I like the functionality of their platform, how it can generate client invoices for me, and keep all my financial info in one place.
If you are just starting out and want to save some money though, you can use an excel sheet to keep track of your financial information. For example, I use excel when I am living in India and dealing mostly with cash (more on that in a minute). Every night when I go home I quickly take a record of what I spent money on and how much.
That was another lesson I learned the hard way. Keep track of cash, and save your receipts!
Fashion Accounting Tips
7 Things To Keep Track Of
There are a few numbers you want to keep track of in inventory. The first is, how much of each SKU (stock keeping unit) you have. Once you know this, you can calculate two other important numbers. One is the cost of goods. How much did they cost to make? The second is the value of the goods. When they are sold how much money will you make?
It is important to take inventory regularly as things change - ie sales and returns. You also want to keep in mind that the future value of the goods depreciates the longer they are not sold. Once your customers see a style one season, it becomes harder and harder to move that style seasons, or even years later. A 2020 summer dress that sold for full price, might need to sell for 50% off in the fall.
Keeping track of inventory is a great way of forecasting future money coming in. It is also important to make sure nothing goes missing.
If you are hiring employees that will be handling your shipments, taking inventory is crucial. I hate to say this, but merch has a way of finding legs and walking off. Things go missing. That is just a fact of this industry. I wish it wasn't so, but unfortunately its the reality. So, by making a plan to take inventory regularly you are actively keeping track of stock, and when people know you are on top of stock numbers, they are less likely to steal.
And, sometimes things just disappear and you forget why. I have an entire storage unit filled with goods clients dumped on me, deadstock, etc. I often find myself giving pieces away. When someone orders an old-style from the website, most of the time I'm like hey, thanks for your order, do you also want something for free from this catalog of deadstock garments?
Or, I find myself giving it away to friends and family randomly. It's hard to keep track of all the giveaways. So, I try to make it a point to do inventory at least twice a year.
2. Accounts Receivable
This number is all the money owed to you that you should be receiving soon. This number does not include loans or investors' money.
It's important to note that stock is not part of this. You can think of accounts receivable as money owed. Stock is not money owed to you, it is revenue you will hopefully make in the future.
An example of an account receivable item would be a payment from a boutique. As you start dealing with retailers you will learn that they love to buy on terms. Sometimes they will take your product, sell it in their store, and not pay you for it for up to 90 days.
These delays in payment can become difficult to remember. Think off all the times you lent a friend a couple of dollars, and then totally forgot about it. Then when you remembered so much time had passed it almost seemed petty to bring it up. That's the same thing here.
The accounts receivable section of your books helps you keep track of what is owed and when it is owed to you.
Here is another example with my business.
Generally, I work with my clients like this. During the sampling process, 100% of the invoice is due in order for the factory to start sampling. And during production, they must pay 50% of their production invoice to start production, and the remaining 50% must be paid before ex-factory (that means before the goods are taken by the freight forwarder and leave the factory).
Pretty straight forward.
But, things are different now. I have clients I have worked with for a while and I know they are good for the money. And, COVID has hit many of my clients hard and they are strapped of cash. I am working in new and different ways when it comes to payments. And, now everyone has a different payment plan. Keeping track of who owes what and when in my head is literally impossible.
That is why for me with the accounts receivable section of my books that my bookkeeper prepares is so important. I use it to help guide me for when to remind clients that a payment will be due soon, and follow up on late payments.
To me, this section is one of the most important.
3. Payroll Expenses
This is what you pay your employees. If you plan to have full-time employees there are other expenses than just their salaries. There are also things like payroll taxes, insurance, and social security.
If you are just starting out, I recommend hiring freelancers. Chances are you will not have enough work for a full-time employee.
Freelancers are also also known as independent contractors.
I only work with freelancers and independent contractors. There are pros and cons to this. The pro is it allows me to work with tons of different people with different skills. If I know someone specializes in a specific skill I can outsource that project to them. When you have just one employee they kind of become a jack of all trades but master at none.
But, the downside is that you are not always a priority to your freelancer. Maybe they have another job that pays more. Or, maybe they are simply busy. Independent contractors don't actually work for you, so they tend not to be as motivated as a full-time employee. They have the reputation of being flakey. And, that is partially true. I have worked with both amazing freelancers, and terrible ones.
Pro tip - When hiring freelancers, always get lots of references before you jump into a project.
4. Accounts Payable
This is the other side of the coin of accounts receivable, and arguably not as fun. Accounts payable keeps track of the upcoming future payments you will owe.
This is the critical information that you want to keep track of in accounts payable:
- Date due
- The date you will start to be hit with penalties it not paid on time
- Who you are paying
- How much
- How it is paid (check, auto-deposit, cash, etc)
Most of my payments for virtue + vice are on auto payment. It's one less thing for me to have to worry about. But, be careful with autopayments - you don't want to end up over-drafting your account. For this reason, having a good understanding of your cash flows is important.
In the states, I don't pay for much in cash. Really the only thing that comes to mind is tipping. But, in India, it's all cash. India has come a long way entering the world of digital finance and payments, but cash is still king there.
Many vendors will offer you a discount if you pay in cash. And, they will even offer you a further discount if you pay in USD. AND, $100 US notes are valued at higher than $20 or $10's so they give you more negotiating power. Lastly the newer the note the better. So, I use cash for everything. Not only do I get to skip the credit card transaction fees (which in India they pass onto the buyer), but I can often negotiate better deals.
Side Story - What is India Cash Crazy?
Part of this is cultural. India is a country of savers. They do not spend the way we do in the West. You can even see this culture of savings built into the Hindu religion. During Diwali, it is customary for families to buy gold to save. Yep, they literally buy and store gold bricks in their house.
The second thing happening here is that the rupee continues to depreciate against the dollar. Every year I return to India I get a little bit more for my money when I convert to rupees. Indians hope that by accepting payment in US dollars they can hold on to them for 5, 10, maybe even 15 years then exchange them when the rate is much higher.
Anyway, most of you probably won't be paying for much in cash. But, if you are it is one of the easiest categories in bookkeeping to forget.
If you do pay in cash, just make sure to keep track of it, or at the very least, keep your receipts.
This number accounts for when those inventory units, actually turn into sales and money coming in. Keep track of this, because it will help you monitor your cashflows and bank balances.
Keep track of the things you buy for your business. From ink for your printer to shipping labels. All of this needs to be recorded. And, when your accountant does your taxes some of these purchases will probably qualify as tax-deductible business expenses - ultimately lowering the amount of money you owe the government at the end of the year.
You can make your bookkeeping as simple or as complex as you want. I recommend starting with something simple that is easy for you to understand and fill out. You don't have to get all high tech with excel formulas and complex spreadsheets.
Create an excel, make a tab for each fo the 7 bookkeeping categories, and keep a list of everything there. Commit to updating the excel at least once a week.
I see a lot of brands get stuck with bookkeeping because they try to make and use these super fancy excel templates. But, they end up becoming frustrated.
Pro tip - Keep your book keeping simple so committing to using it won't be a burden. This way, when tax season rolls around it will be a breeze.