# Currency, cost and liquidity risks in fashion
A brand orders 100,000 meters of Italian fabric in January, priced in US dollars. By the time the invoice clears in April, the dollar has moved 6% against the euro. That swing alone can erase the margin on an entire capsule collection, before a single garment sells. This is the daily reality of fashion finance: money leaks between the design table and the cash register.
This lesson breaks down the three financial forces that squeeze a fashion brand's cash: currency (FX) risk, commodity cost risk, and liquidity risk driven by supplier terms and unsold inventory.
Fashion sits on a long, cross-border, cash-hungry supply chain.
That timing gap (order now, pay soon, sell later) is where the risk lives.
FX risk is the danger that exchange rate moves change the local-currency cost of something you priced in a foreign currency.
Most global commodity fabric and much Asian manufacturing invoices in US dollars. A European brand earning euros but paying dollars is "short dollars": if the dollar strengthens, its costs rise.
Assume a European brand orders fabric worth $2,000,000.
The FX move added EUR 104,895 to the same order, roughly a 5.8% cost increase, with zero change in the product. (Illustrative figures; rates fluctuate daily.)
Large groups like Inditex (Zara) and LVMH run active hedging programs and disclose FX sensitivity in their annual reports. Smaller brands often carry the risk raw, which is exactly where due diligence should probe.
The second squeeze comes from the raw material itself.
Cotton is the clearest case. It trades on the ICE Futures exchange and is famously volatile. Prices spiked sharply in 2010 to 2011 and again in 2022 on supply shocks and freight disruption. A brand with fixed retail prices cannot pass a sudden 30% cotton jump to shoppers mid-season.
Synthetics (polyester, nylon) are derived from oil, so they inherit energy price volatility. Wool and leather have their own cycles.
You can track live cotton pricing and background via the USDA cotton market data, a free public resource.
Fashion sets prices early. The tag on a summer dress is often decided 6 to 9 months before it hits the floor. If input costs rise after pricing is locked, the gross margingross marginGross margin is the share of revenue left after subtracting the direct cost of producing goods or services, expressed as a percentage of revenue.View full definition → (revenue minus cost of goods sold, divided by revenue) compresses directly.
Simple illustration:
Ten margin points vanish with no ability to reprice a printed catalog or a season already in stores.
Liquidity risk is the risk of not having cash available when you need it, even if the business is profitable on paper.
Fashion is a cash-conversion nightmare because of two clashing forces: supplier payment terms and unsold inventory.
Suppliers, especially fabric mills and factories, increasingly demand deposits upfront and short terms. A brand may pay a 30% deposit at order and the balance on shipment, long before the product sells.
Meanwhile powerful retailers and department stores push the other way, paying brands on 60 to 90 day terms. The brand is squeezed from both ends: pay early, get paid late.
The key metric is the Cash Conversion Cycle (CCC), the number of days cash is tied up:
CCC = DIO + DSO, DPO
A worked example for a mid-size brand (illustrative):
CCC = 120 + 45, 30 = 135 days.
That means the brand funds itself for 135 days out of pocket on every cycle. High DIO is the fashion killer: seasonal stock that misses its window becomes markdown fodder.
Inventory is cash frozen in physical form. When product does not sell:
This is why off-price channels (TK Maxx / TJ Maxx, outlet villages) exist: they absorb overstock, at a steep discount. Burberry drew public criticism in 2018 for burning unsold goods to protect brand valuebrand valueThe commercial value your brand adds beyond functional product attributes: the price premium, preference and loyalty it generates.View full definition →, and later pledged to stop, a vivid reminder that inventory risk is both financial and reputational.
Knowledge check
1. Why is fashion described as structurally exposed to financial risk?
2. A European brand earns euros but pays for fabric in US dollars. Why is it said to be 'short dollars'?
3. In the worked example, the same fabric order became more expensive in euros without any change to the product. What concept does this illustrate?
4. Select ALL correct answers about the factors that make fashion brands vulnerable to currency risk.
Select all the correct answers.
5. Select ALL correct answers describing the three financial forces this lesson identifies as squeezing a fashion brand's cash.
Select all the correct answers.
These risks intersect with real financial regulation and disclosure duties.
When assessing a fashion brand (as an investor, lender, or acquirer), run these checks:
1. FX exposure: What share of costs is dollar-denominated versus revenue currency? Is any of it hedged, and how far forward?
2. Cash conversion cycle: Calculate DIO, DSO, DPO. A CCC creeping upward year over year signals a cash squeeze.
3. Inventory ageing: What percentage of stock is older than one season? Rising aged inventory foreshadows markdowns and write-downs.
4. Markdown and full-price sell-through: What proportion sells at full price versus discount? Falling full-price sell-through erodes margin quietly.
5. Supplier terms: Are deposits rising? Are terms shortening? Both drain cash.
6. Working capital financing: Is the brand relying on short-term factoring or supply chain finance to plug the gap? Heavy reliance is a warning sign.
A brand can look profitable on the income statement while quietly starving for cash. The balance sheet and cash flow statement tell the truer story.