How to Conduct a Financial Stress Test on Your Retail Apparel Business

Most business owners in the retail industry spend a great deal of time focusing on their customers’ satisfaction. As the owner of an apparel store, you do this by providing the latest trends and styles while keeping costs affordable. From the right atmosphere in your store to the limited, rare pieces that keep your customers coming back, you may think you know what it takes to keep your shop open and running at its best. However, without a financial stress test, you may not know all of the risk factors impacting it.

From 2007-2010, the apparel and overall retail industry saw a significant dip in growth, and many businesses — even large, well-established brands — shuttered their doors. Now, there’s a great deal of change happening in the industry once again, with traditional mall stores no longer seeing the traffic needed to keep their businesses profitable. Is your business prepared for these changes should they happen today or impact you? A financial stress test for your business can provide incredible insight into what risks your business could face, what your financial needs are to keep your business operational, and what steps you can take today to avoid some of those risks.

What Is a Financial Stress Test?

A financial stress test is an in-depth look at your business’s operational security. It is a way of asking “what if,” and determining how you can prevent those risks. It’s not always easy to know what risks are present in the apparel industry, since market trends can change very quickly. However, this type of test can pinpoint many of the most common areas of concern, and give you some tips on what to do to prevent your company from packing up and moving out.

To conduct it, simply answer the following questions in details. Your goal here is to look at any and all types of risks that impact your specific business. Additionally, consider working with an adviser who can further flesh out these risks and provide you with more detailed outcomes.

Who Is Your Primary Customer?

The first step in the process is to identify your primary customer. In the retail industry, this is rather straightforward. Determine the target age and gender of your customers, and the clothing style or themes they look for. What sector of the industry does your business fit: luxury, everyday clothing, or affordable lines? It’s important to outline your customer base so that you can see potential risk factors as they apply to that specific customer.

Who Is Your Competition in the Local Area?

Apparel customers will drive several miles to find malls or destination locations for clothing in many instances. You’ll need to identify all of your competition within a solid 10- to 15-mile radius. Look for stores that offer the same styles, price points, and overall market appeal. Then, consider how this competition compares to you. It’s important to be thorough here and make the connection with why some customers go to another location other than your own.

What Are Your Financial Needs?

The biggest expense in most retail and apparel businesses is inventory. Other costs include your employees, your location costs, and any royalties you pay for branding. Write down all of your expenses based on your profit and loss statements for the last year. Determine what type of revenue your business needs in order for you to break even and keep paying your employees. It’s important to know what your bottom line is here so that you can then track trends to watch for risks.

Track all variables related to your risk factors. Sales are always at the top of the list when it comes to the apparel businesses, but others include employee retention, customer count (not just sales), and overall product costs.

What Are Your Risk Factors?

Now, it’s time to develop a list of risk factors. These should be as specific to your business as possible. The goal here is to pinpoint the “what if” scenarios that could cause your apparel business to struggle to stay open. You can then use this information to plan for ways to avoid the problems. Here are some examples.

  • Could consumer shopping trends change, leaving your business struggling? For mall locations, drops in traffic to that mall could impact your ability to stay in business. That’s a big industry trend occurring right now.
  • Increasing rental costs at your location could impact your profitability.
  • You may see ever-growing demand for eco-friendly products. Can you meet these needs?
  • How will retail trends impact your business?
  • What if the economy begins to struggle and consumer discretionary income drops? Could your business maintain a drop in customers? How much so?

Addressing these and other risk factors impacting your business is essential. With this information you can make better decisions for your company’s future and potentially prevent the worst from occurring.