Prepared in partnership with Gary A. Wassner, Hilldun Corporation
Managing the relationships with your retailers can be one of the most difficult processes youâll have to deal with in the evolution of your business.Â Â It would seem as if it should be relatively simple.Â You make a product, a store engages in a contract with you to purchase it, you ship it, the store pays for it.Â Â But oddly enough, the dynamic is a particularly unusual one and doesnât always follow that simple pattern.
As a fashion design firm, your responsibility is to design, manufacture and deliver a product.
When you are new in business, youâre thrilled, elated almost, when a store places an order for what youâve put your heart and your soul into. It validates all that youâve strived for.Â Youâre an artist, your medium is cloth, metal or leather, and youâve created something that an independent third party, engaged in the business of evaluating just such a creation, has determined that they like enough to order and pay for.
The immediate inclination is to accept the purchase order with gratitude and never look back.Â But unfortunately, that inclination has to be tempered by careful analysis of many aspects of the order that has been placed.
THE PURCHASE ORDER
What may at first seem a simple document, the purchase order is a contract and can be written in many and varied ways.
- The terms need to be agreed upon, understood, and the purchase order needs to be signed if you hope to have any recourse later, should things not conclude as planned.
- Many stores, particularly the major department and specialty stores, have pre-printed purchase order forms.
- Many small stores write their orders on the designerâs order forms and leave them with the sales representatives either in the showrooms or at the trade shows. These orders need to be reviewed by the designer, confirmed by the store and signed by an authorized representative of that store.
- An unsigned purchase order is not a binding contract.
The 5 things a purchase order must have:
Description of the merchandise ordered
Dollar amounts extended for each style
Start Ship Date
- It is important that the buyer (the retailer) insert a billing name and address as well as a âship toâ address (if different from the billing address) on the purchase order.
- It is essential that the billing address be the legal entity responsible for the payment of the invoice,Â and if the designer is factored, it is essential that the approval for that order has been given to the entity that the invoice will ultimately be billed to.
In the designer/luxury apparel market, ready to wear terms are almost always NET 30 days or 8/10 EOM for credit worthy retailers.
The invoice will be paid 30 days from the invoice date.
If the merchandise arrives in the store much later than the invoice date, it is likely that the retailer will take additional days to pay.Â It is essential that the designer date the invoices accurately and not prior to the actual ship date of the merchandise.
Provides the retailer with an 8% discount from the invoice amount if they pay the invoice 10 days from the end of the month in which the merchandise is shipped.
The exception to this rule applies if the merchandise is shipped after the 20thÂ of the current month. Then the invoice would be due 10 days from the end of the following month, effectively giving the retailer a considerably longer period in which to pay.
Terms of NET 45 days and NET 60 days are also commonly accepted for ready to wear and accessories, but certainly not preferable from the designerâs point of view.
Consignment: If a store asks you for consignment terms, youâre not actually selling them the merchandise. Youâre agreeing to let them borrow it and return it if they cannot or do not sell it.
If you guaranty the retailer sell-through percentages, you are also opening the door to mark downs and charge backs later on, even though you have produced the order properly, shipped it on time and complied with all the other terms of the purchase order.
The sooner you are paid for the merchandise you ship, the better your cash flow will be and cash flow is essential if you hope to turn your available capital into inventory for further sales, as efficiently as possible.
|A purchase order is a contract â a legally binding agreement|
|You should never allow yourself to be a victim of theâShip and Hope mind-setâ
If youâre worried that a store wonât pay you, then you shouldnât be shipping to them at all.
Even after you have your purchase orders in hand and youâre satisfied with the contract and the terms, you still must determine whether or not the store is credit worthy.
Determining If a Store is Credit Worthy
Donât ask anyone in your sales department to evaluate credit.Â If you do, youâre essentially asking someone who has a vested interest in the sale itself to give you counter-intuitive advice.Â There are reasons why editorial departments and advertising departments are kept separate by publishers.Â Those same reasons should apply to sales departments and credit departments.Â Decisions are made for the wrong reasons if the lines between the two get blurry.Â Donât judge the credit worthiness of a store by its physical appearance or location.Â Donât judge the creditworthiness of a store by the press it gets.Â And finally, donât judge the creditworthiness of a store by the other designers it carries.Â All of those criteria are useful and important only after youâve done your due diligence on the credit side.
Ask for credit references from the storeâŚ.and check them!Â Call the other vendorâs accounts receivable manager, not sales manager, and inquire regarding their history and their current outstanding balances with the store in question.Â Ask them what terms they extend to the store.Â Ask them the high credit â the largest amount theyâve allowed the store to owe them at one time. And finally, ask them if they pay according to terms, and if they are current with them now.
Call at least two Factors and ask if they are approving the store and for how much.Â Factors have more of a stake in evaluating credit properly than the credit reporting agencies have, simply because they are responsible for the payment to the vendor if they approve a storeâs credit and the store fails to pay due to financial inability.
|Factors have more of a stake in evaluating credit properly than the credit reporting agencies.|
Credit reporting agencies simply report on payment history and trends, and they gather financial information for those purposes.Â The information they can provide is important and useful, but not singularly exhaustive.Â You need to dig deeper in order to secure yourself as much as possible.
If a factor is declining the store for credit, inquire as to why. Â A factor will decline a store for many and varied reasons, some of which are immediate red flags and you should subsequently decline the store yourself.
If a store has been placed for collection, if it is past due with the factor, if it is being declined for credit losses, unbalanced financial condition or unsatisfactory recent experience then you shouldÂ NOTÂ be selling to this store on terms.
REASONS NOT TO SELL TO A RETAILER
|The store is being declined for unbalanced financial condition.|
|The store is being declined for unsatisfactory recent experience.|
|The store is being declined for credit losses.|
|The store is past due with the factor.|
|The store has been placed for collection.|
If a store is being declined for not providing current financial information or for providing unsatisfactory information, or if they are being declined because their credit lines are full, you should do more research before making your decision.
|âLimit fullâ means the store is getting credit in the market. It is not necessarily a reason for you not to ship.It is just a reason to be cautious.|
Limit fullÂ means the store is getting credit in the market.Â It also means that the credit itâs receiving from vendors and factors in not unlimited, and that it has currently utilized all the lines being provided.Â If the store makes payments against those open lines, more credit will free up for it.Â So thatâs not necessarily a reason for you not to ship.Â Itâs just a reason to be cautious.
If the store has refused financials, thereâs usually a reason.Â More than likely, those financials would not be good, so the store refused to provide them to the trade.Â In many cases, factors and major vendors sign confidentiality agreements with retailers so that they can properly evaluate the creditworthiness of private retailers who do not wish to make their financial condition public.Â In those cases, the only way for you to evaluate credit is to gather the opinions of those who have entered into said agreements, if theyâre able to divulge them without breaching the agreements.
EVALUATING WHEN TO SHIP
When you decide to decline to ship an order from a store on terms, you can still do business with that store.Â Â Donât be shy though.Â If youâve done your homework and evaluated the risk properly, then you are not the only vendor declining this store.Â It should not be a surprise to any retailer when terms are not being provided to them.Â As the manufacturer, your costs are all up-front, before you ship.Â If you are going to properly manage your own cash flow, then youâll need to establish pre-pay and credit card terms in advance of putting in your cutting tickets or production orders.Â A store that wants your merchandise and is being declined for terms should be willing to pre-pay you 30 to 40 percent of your wholesale price before you go into production.Â If they simply give you a credit card number and ask you to charge the card when you are ready to ship, be aware that, the card may be declined by ship date and youâll be left with unsold inventory.Â Take a deposit from those stores which you are declining to sell for the reasons listed above.Â If they are unwilling to pre-pay your cost of goods, do NOT produce product for them.
|If you are going to properly manage your own cash flow, then youâll need toÂ establish pre-pay and credit card terms in advanceÂ of putting in your cutting tickets or production orders.|
CHARGE-BACKS AND MARKDOWNS
One would think that after doing all the work it takes to design, sell, evaluate credit and finally ship the finished product, youâve protected yourself from all contingencies.Â Unfortunately, thatâs not always the case.Â For some reason stores sometimes believe that although you never get paidÂ moreÂ if your product sells at retail extraordinarily well, you are expected to share in the downside of the retail experience.Â Charge-backs for failure to ship according to the retailerâs instructions are annoying and costly, but understandable.Â Markdowns and/or allowances for merchandise that hasnât sold well are another story.
If you have been careful not to guarantee any sell-through percentage in your purchase order, then you are not contractually responsible if the merchandise your customer bought has not performed as they hoped.Â But, as stated earlier, managing your relationship with your stores can be extremely difficult.
If your buyer bought well and if your sales staff directed them properly and did not oversell your line, then you have every reason to expect full payment for what you shipped, providing you shipped it according to the order dates and specifications.
But what should you do when one of your important stores contacts you for a discount after the fact?Â Thatâs a tough question that doesnât have a simple answer.
You are not obligated to provide discounts.Â Simply say noâŚ.nicely.Â Â You are not responsible for all of the many and varied reasons why your merchandise didnât perform at retail.Â Economic conditions, floor placement, poor buyer choices, lack of promotion etc. can all contribute to a weak sell-through.Â You didnât force the store to purchase your line.Â They chose to, and youâve done your part to provide them with the best opportunity to retail it profitably.Â But as we all know, that doesnât always matter.
|You are not responsible for all of the reasons why your merchandise did not perform at retail. Economic conditions, floor placement, poor buyer choices, lack of promotion, etc. can all contribute to a weak sell-through.|
But if you feel that there is an implicit threat that this store will not continue buying your collection unless you offer something, then you need to evaluate what that will mean to your subsequent season.Â You also need to keep in mind that patterns of payment by retailers tend to repeat themselves. You may find that dealing with this particular store will be unprofitable for you in the long run because each season you will be faced with the same decision: Give them what they want and sacrifice any profit for the season, or lose them as a customer.
|Providing a discount against the next seasons order, rather than a credit against the previous seasons solves a number of problems immediately.|
Clearly, youâre in business to make money, not to lose it. So if you suspect that each season will be unprofitable with this particular store, then you need to cut the umbilical cord and move on.Â But if you determine that you want to try again with this retailer, the next best way that you can handle this with regard to your business and preserving your margins while satisfying your cash flow issues, is toÂ suggest that you provide a discount against next seasonâs order, rather than a credit against the previous season.Â This will solve a number of problems for you immediately.
You get compensated for what you already have produced, paid for and shipped.Â You also then have the opportunity to trim your costs on your next seasonâs order from this retailer, to minimize the effects of the discount youâve agreed to will create for your bottom line.Â Frequently though, a buyer will agree to deduct credits against the next season only after you ship, but they will advise their accounts payable department of the credits immediately.Â Those credits will appear on your account at once, and in many cases they will be deducted from the first checks processed for your account.Â Â Make sure, if your buyer agrees to this option, that they do not post the credits to your accountÂ until later onÂ so that they are actually deducted from the future shipments, as agreed.
If this option is unacceptable to this retailer, and the buyer is still insisting that you must do something to compensate them for a weak sell through, try to wait until you have a confirmed PO in hand for the next season before you agree to anything.Â Otherwise you may find youâve agreed to lose money this season and youâve gained nothing going forward.Â Without a future order, you have little or no reason to agree to charge-backs or markdowns on the current season.
Itâs not enough to design beautiful clothing and accessories. To be successful in this industry, you need to be smart, savvy, inquisitive and mature, in addition to being creative.Â Far too many young designers rise quickly and fall just as quickly, because they failed to take the business side of fashion seriously.Â And pride goeth before the fall as soon as the bills pile up and credit for piece goods and manufacturing runs dry.
|Far too many young designers rise quickly and fall just as quickly, because they failed to take the business side of fashion seriously.|
Industry accolades and press recognition can be incredibly seductive but they can also be thoroughly misleading.Â The press needs to report.Â Thatâs their job, and magazines and newspapers need to fill their pages every day and every month.
Being in the window of Bergdorf Goodman or Barneys New York is certainly a tremendous thrill, but if the item(s) featured in the window end up as an RTV on your doorstep a month later, the thrill is gone.
Shows are wonderful and exciting, and they can draw attention to you in many ways, but they are expensive and they take their toll both economically, physically and emotionally on young companies.
We need to question and evaluate everything, and we need to listen to those who have walked the same path before.Â Each and every designer has a window of opportunity that does not stay open forever.Â You can prop it up with all kinds of things for quite some time, but the only secure way of keeping it open long enough to be able to climb through it to a career in this industry, is to design a great product that you ship on time, that you make impeccably well and that you ultimately get paid for by the stores you sell it to.