Everything Finance for the Fashion Business Entrepreneur by Andre Taitt

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EVERYTHING FINANCE
FOR THE FASHION
BUSINESS
ENTREPRENEUR
Facilitator – Andre Taitt
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CONTACT INFOMATION
Andre Taitt
andre.taitt@gmail.com

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Patrizio Bertelli and Miuccia Bianchi Prada
The crucial point is that the creative and commercial needs of
the brand have to be on equal footing for the company to be a true
success (Wall Street Journal , March 11 2010)
What is Finance?
Finance is concerned with value, or
more appropriately, creating and
measuring value.
Profitability
Viability
Every decision you make in
your business is a finance
decision. Facilitator – Andre Taitt

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“You have to understand accounting
and you have to understand the
nuances of accounting. It’s the
language of business and it’s an
imperfect language, but unless you are
willing to put in the effort to learn
accounting…how to read and interpret
financial statements…you really
shouldn’t select stocks yourself.”
WARREN BUFFET
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ACCOUNTING
PROFIT VS
CASHFLOW

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Financial Accounting
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Accrual vs cash basis of Accounting

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Traditional Assumptions
of the Accounting Model
Business Entity
Going Concern
(Continuity)
Time Period
Monetary Unit
Historical Cost
Conservatism
Realization
Matching
Consistency
Full Disclosure
Materiality
Industry Practices
Transaction
Approach
Cash Basis
Accrual Basis
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FINANCIAL
STATEMENTS

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Financial Statements
Business entities may have many objectives. The two
primary objectives of every business are solvency and
profitability. Solvency is the ability to pay debts as
they become due. Profitability is the ability to
generate income.
Unless a business can produce satisfactory income
and pay its debts as they become due, other
objectives a business may have will never be realized
simply because the business will not survive.
The Financial statements that reflects a company’s
solvency is the Statement of Financial Position and
the Cash Flow Statement. The Financial statement
reflecting the company’s profitability is the Statement
of Comprehensive Income
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Financial Statements

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Financial Accounting
Coverts firms’ day to day operating activities into
general-purpose Financial Statements
Primary financial statements:
Financial Position (Balance sheet).
Statement of Comprehensive Income (Income
statement).
Statement of Stockholders’ Equity (Statement of
retained earning)
Statement of Cash Flows.
Common rules used so you can compare with
other companies’ financial statements.
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Basic Accounting Concepts
Double entry Accounting
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Basic Accounting Concepts
Created in 15th century – Luca Pacioli
Summa de Arithmetica, Geometria, Proportioni et
Proportionalita (Everything About Arithmetic,
Geometry and Proportion).
Purpose
To answer the question - How are we doing
Not convenient to physically count all Assets,
Liabilities and Equity
Developed a system of records
We believe number because of Integrity in system
• Check and Balances / Rules

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TRANSACTIONS
Fundamental Accouting Equation A=L+E
Every accounting transaction has an equal
affect on both sides of the equation.
Dual impact:
Results in maintenance of fundamental
accounting equation.
Double-entry system.
Debit and Credit
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T-ACCOUNTS
The Accountant’s secret – Dr and Cr
Dr = Debit = Left side of account
Cr = Credit = Right side of account
ACCOUNT
Debit Credit
+ -

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DOUBLE ENTRY SYSTEM OF ACCOUNTING
Confusion caused by
Entity principle
• Your Bank book (credited when you make deposits
to your account)
English language
• She is a credit to the company (Favourable)
• Chalk up a debit against him (unfavourable)
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DOUBLE ENTRY SYSTEM OF ACCOUNTING
Asset accounts:
Increases (Dr.)/Decreases (Cr.)
Liability and OE accounts:
Necessarily the opposite to maintain
fundamental accounting equation:
• Increases (Cr.) /Decreases (Dr.)

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Owner invests $100,000 in Business
Cash
(1) 100,000
Paid-in-Capital
(1) 100,000
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Firm borrows $50,000 from bank
Cash 50,000
Loan Payable 50,000
Cash
(1) 100,000
(2) 50,000
(2) 50,000
Loan Payable

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Accounting Records and
Systems
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The Accounting System
Consists of:
Journals.
Accounts
Ledgers.
Rules for using them.
Manual, computerized, or anything
between.
In a computerized system:
Bookkeeping steps are done electronically.

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The Accounting Cycle
Analysis of transactions
What and how much to Dr and Cr
Knowledge of accounting concepts and Judgement
Journalize original entries .
Preparation of the Journal
Post from journal to ledger.
Make adjusting entries.
Journalize and post closing entries.
Prepare financial statements
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MANAGING WITH
FINANCIAL
STATEMENTS

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Vertical Analysis
Each financial statement element is presented as
a percentage of a designated base.
Sales revenue 100,000$ 100.0% 95,000$ 100.0% 91,000$ 100.0%
Cost of goods sold 65,000 65.0% 60,800 64.0% 56,420 62.0%
Gross profit 35,000 35.0% 34,200 36.0% 34,580 38.0%
Operating expenses:
Selling expense 14,000 14.0% 11,400 12.0% 10,000 11.0%
General expense 16,000 16.0% 15,200 16.0% 13,650 15.0%
Total operating expense 30,000 30.0% 26,600 28.0% 23,650 26.0%
Operating Income before taxes 5,000 5.0% 7,600 8.0% 10,930 12.0%
Taxes related to operations 1,500 1.5% 2,280 2.4% 3,279 3.6%
Net Income 3,500$ 3.5% 5,320$ 5.6% 7,651$ 8.4%
Melcher Company
Income Statement
2016 2015 2014
For the Years Ended December 31
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Horizontal Analysis
2015 2014 2013 2015 2014 2013
Sales revenue 100,000$ 95,000$ 91,000$ 109.9% 104.4% 100.0%
Cost of goods sold 65,000 60,800 56,420 115.2% 107.8% 100.0%
Gross profit 35,000 34,200 34,580 101.2% 98.9% 100.0%
Operating expenses:
Selling expense 14,000 11,400 10,000 140.0% 114.0% 100.0%
General expense 16,000 15,200 13,650 117.2% 111.4% 100.0%
Total operating expense 30,000 26,600 23,650 126.8% 112.5% 100.0%
Operating Income before taxes 5,000 7,600 10,930 45.7% 69.5% 100.0%
Taxes related to operations 1,500 2,280 3,279 45.7% 69.5% 100.0%
Net Income 3,500$ 5,320$ 7,651$ 45.7% 69.5% 100.0%
Melcher Company
Income Statement
For the Years Ended December 31
Each financial statement element is presented as a
percentage of a base amount from a selected year.

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IMPORTANCE OF LIQUIDITY
“One of the things you will find – which
is interesting and people don’t think of
it enough -- with most businesses and
with most individuals, is life tends to
snap you at your weakest link. The two
biggest weak links in my experience:
I’ve seen more people fail because of
liquor and leverage –leverage being
borrowed money.”
WARREN BUFFET
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IMPORTANCE OF LIQUIDITY
DEFINITION
Liquidity refers to an entity’s ability to pay it’s debts
without disrupting productive capabilities.
Short-term Liquidity analysis specifically
measures a firm’s ability to pay current obligations
with cash generated internally.
IMPORTANCE
“Even a very profitable entity will find itself bankrupt if
it fails to meets its obligations to short-term
creditors.”
- CL Financial
- Bear Stearns
- Washington Mutual

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Current Ratio
Current Assets
Current Liabilities
Acid-Test (Quick)
Ratios
Current Assets - Inventory
Current Liabilities
Cash Equivalents
+ Marketable Securities
+ Net Receivables
Current Liabilities
 
 
 
 Working Capital
Current Assets – Current Liabilities
BALANCE ASSET FINANCING
Solvency Analysis
Ability to stay in business over
the long-term
Debt-to-
Equity
Ratio
Debt
Ratio
Times
Interest
Earned
Cash Flow
from Operations
to Capital
Expenditures
LO5Facilitator – Andre Taitt

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Profitability Analysis
Rate of Return on Assets
Return on Common Stockholders’
Equity
Asset Turnover
Earnings per Share
Price/Earnings Ratio
Dividend Ratios
LO6Facilitator – Andre Taitt
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Internal Control System
Consists of the policies and procedures
necessary to ensure:
• The safeguarding of an entity’s assets
• The reliability of its accounting records
• The accomplishment of its overall objectives
LO3
Cash Management
Necessary to ensure
company has neither
too little nor too much
cash on hand
Tools
• Cash flows statement
• Bank reconciliations
• Petty cash funds
LO2

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Limitations on Internal Control
No system is entirely foolproof
• Employees in collusion can override the
best controls
• Cost vs. benefit tradeoff
Document Flow for Merchandise
Check
Prepared
Purchase
Requisition
Receiving
Report
Purchase
Order
Invoice
Approval
Purchase
Invoice

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Technical analysis for
management control
•Pricing Clients
•Cost benefit analysis
•Break even analysis
•Budgeting
The Cash Budget

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Cost-Volume-Profit
Relationship
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Data
Fixed costs (TFC) $400.00
Variable costs (UVC) $6.00
Selling price (UP) $8.50
50 100 150 200 250
$2,000 -
1,600 -
1,200 -
800 -
400 -
0 -
TotalCostorRevenue
Volume
Revenue
160 = breakeven
Cost
Loss
Zone
Loss
Profit
Zone
Profit
Profitgraphs

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CREATING
FORECASTS
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KEY IS YOUR
ASSUMPTIONS MUST
BE REALISTIC.
SHOULD BE BASED
ON EVIDENCE/
RESEARCH

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CASHFLOW IMPROVEMENT
Invoice immediately after you deliver goods or
services.
Consider shortening your payment terms - to 30 days
from 60 days, for example.
Offer a small discount to customers who pay their bills
early and charge a penalty to those who pay late.
Do a financial check on new customers before offering
them credit. Also check their business references.
Monitor your receivables on a regular basis and follow
up with late payers when appropriate.
Use your business credit card to pay suppliers.
Put your excess cash to work
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BUSINESS
PLAN
/PROPOSAL

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BUSINESS PLAN / PROPOSAL
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We Are All Entrepreneurs: It's A
Mindset, Not A Business Model

Everything Finance for the Fashion Business Entrepreneur by Andre Taitt

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