As an aspiring fashion entrepreneur, it is easy to be caught up in the creative aspects of launching a startup: deciding on a name, developing the brand, and designing your product or service. While accounting may not be a point of attraction for many creative individuals, it is an essential practice that all entrepreneurs should have a basic understanding of.
As a fellow creative, I recognize how daunting it can be to address the analytical side of a business. I often reflect on my first week of business school and how nervous I was when introduced to the topics we’re covering today. Although these subjects may seem unfamiliar at the moment, we encourage you to keep an open mind as we break them down step by step to ensure you leave with a solid understanding of not only why these skills are important to acquire, but also how you can apply them to your own ventures. Let’s get started with the Top 5 Accounting Skills Needed to be a Fashion Entrepreneur:
Before you consider any of the following business structures, you should first identify existing fashion business models to follow or take inspiration from and begin mapping out your own model. Remember, it should be realistic and complimentary to your customer value proposition. If you ever feel stuck at this stage, refer to the Business Model Canvas, which is a helpful guide for establishing your company vision and plan. The BMC prompts you to address questions and gain insight as to which of the following structures fits best with your model.
In an ever-changing industry like fashion, it’s critical to understand how your future business decisions will impact the success of the company.
Our first accounting skill, understanding the various types of taxation and legal structures that exist, will assist you in crafting the final business plan you’ll present to investors. To learn more about specific parts of a business plan, check out our How to Write a Business Plan for Your Fashion Brand blog. Now, let’s begin by analysing the 3 most common types of business structures:
Sole Proprietorship. A Sole Proprietorship is a business that runs and is owned by a single person. This is a good option if you’re someone who prefers to have complete control over your business operations. Like any structure, there are advantages and disadvantages you’ll need to consider.
Partnership. A Partnership is a business that two or more people own and operate together. The partners have a financial investment in the firm and coordinate with each other during decision-making processes.
LLC. A Limited Liability Company is a business structure that offers personal liability protection and the option of being taxed as a partnership or corporation.
Not too bad, was it? That’s the beauty of accounting, it’s not just a mindset, but it’s also a language. Learning how to use the correct terminology will help you better convey your ideas to investors and customers. This is the reason why accounting is also called the language of business. Talking about using the right terminology, in the next section of the post we’re going to explain what we mean with assets, liabilities and shareholder’s equity.
Assets, liabilities, and equity are the three components of a balance sheet. The Accounting Formula (Assets = Liabilities + Equity) uses these metrics to test if a balance sheet is “balanced”. Why do fashion entrepreneurs need to know about these? These three categories allow entrepreneurs and their investors to evaluate the overall health of the company.
Assets. Assets consist of any resource, material, or object of value a company possesses. For example, if you plan to open a retail business with staff, you’ll need to lease a suite and purchase fixtures, technology, and supplies to run operations. You’ll also need mannequins, store materials, and of course—inventory! We can segment these assets into a few categories, but here are the main two:
Together, both types of assets bring value to your company and allow you to generate cash flow.
Liabilities. Liabilities fall under the umbrella of everything the company owes to other entities. Suppliers, customers, distributors, government tax agencies, and banks are examples of common collectors that owners are liable to. Just like assets, any liabilities that a business owner will need to pay off within a year are called current liabilities. Separating current liabilities from long-term liabilities, like loans, allows business owners to plan accordingly for short-term commitments.
Shareholder Equity. Shareholder Equity represents the current net worth of the company. It shows the assets that the company owns after recognizing its expenses and liabilities. Here are some categories of equity and how they are presented on the balance sheet
Interesting in learning more about financing your fashion start-up with private equity investments? Visit our blog here.
The Profit and Loss Statement summarizes financial transactions in order to report revenues and expenses for the purpose assessing the operating performance of a business. This is a useful tool for small-business owners to pinpoint which areas of their business are performing under or over budget.
The income statement is broken into sections of lines grouped together by categories. The category formatting guidelines depend on if the company is taking a single step or multi-step approach when creating their statement, take a look at the picture below for an example.
At the top of the statement are the Revenues, next are Expenses, and finally, we calculate our Net Income by subtracting Total Expenses from Total Revenue. Refer to the pictures below to see the difference in statements:
Simple VS. Multi Step
Great. Now let’s move ahead to the balance sheet, and how it provides a picture of our organisation, in terms of what it owns and owes. Intrigued? Read further!
The balance sheet, unlike the income statement or other financial reports, is a “snapshot” of a company in a specific moment in time. Balance Sheets provide knowledge of the businesses’ financial position, as well as what they own and owe.
All balance sheets tend to follow the same formatting guidelines:
Every company hopes to report a positive equity amount on its balance sheet. If a company’s debts exceed its profits for that period, we consider this a deficit. Shareholders have no responsibility to cover the business’s debts, but they may lose up to their initial investment amount.
Now that we’ve dominated financial statements, we can move onto something very dear to fashion merchandisers and producers, inventory costing assumptions. The name may be intimidating, but it’s actually a very intuitive approach to keeping your costs in check.
Keeping an accurate record of profit and revenue stream from fluctuations in inventory is very important. Let’s consider this example. A fashion entrepreneur is looking to account for merchandise inventory must first choose an inventory cost flow assumption. This assumption is a rule for how the accounting system assumes that inventory costs move through the organization.
As fashion entrepreneurs, the accounting skills covered in this blog will play a vital role in running a business. We identified 5 top skills:
Using these accounting tools will provide investors, management, and yourself with meaningful financial information to assist in making quality decisions.
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