The operation just grew: In the first of a series about what makes more creative businesses tick, Paul Smith, the designer and retailer of men's fashions, talks to Richard Lander

I would never say our clothes are cheap, but I balk when people tell me they're expensive. Compared to what? If you look at other fashion houses who use fabric from the same suppliers - Armani et al - we're actually some 20 per cent cheaper because we take lower profit margins at the wholesale level and we don't have their grand showrooms and advertising budgets.

And it's wrong to compare us with Next and others. Out of 29 countries we deal with, Britain's the only one where the high street is dominated by price-cutting chains. On the Continent we deal with small shops, often family-owned.

Our collection is unconventional in both size and depth. Quantity is the key to keeping costs down and we have shorter runs than most - we might do a run of 500 sweaters while Marks & Spencer wouldn't do less than perhaps 20,000. But we want to make it unlikely that you'll go into a pub or club and meet someone wearing the same thing.

We compensate by having a much wider range than other designers - maybe 1,600 rather than 600 items in a collection. That means almost three times as many paper patterns in graded sizes. Then there are the detailed specifications - colour, buttons, linings all multiplied 1,600 times. It becomes like an army manoeuvre.

We probably suffer less from an increase in variable costs than most businesses - we do get affected when the pound drops or cashmere prices go through the roof. But our clothes are not price-sensitive like other commodities in the sense that sales would drop if a suit was pounds 10 more expensive.

Preparing a collection is an incredibly long and expensive process and is one of the main reasons why fashion companies go under. I started work on the spring 1994 collection back in February, drawing up the overall look of the collection, picking the colour themes and visiting mills to supply and develop the unique fabrics we need - a one-off print or stripe. We want to be leaders not followers so that means doing something subtly different even with a standard navy blue wool.

By May we have the sample metres made up into mock-ups and samples are then made for the selling shows. We have our own showrooms in Milan, Paris, London and Tokyo and stage our own show in Paris. It's at this time that the wholesale orders are placed and once they are collated and fabric bought, production will start about June or July. The treadmill never stops. By this time I'll already be working on the next season's collection.

When the orders have actually shipped, cash flow is at its weakest and this is when some houses get stretched to busting point. All the money has gone out on hotels, flights, zips, buttons, fabrics and shipping. The actual production of clothes - cut, make and trim - is traditionally paid for in seven days. But not a penny has come in from wholesale clients around the world. You need credit controllers who can say 'pay up please' in 30 languages.

We are incredibly lucky to have the retailing side. Give or take seasonal variations, it is a regular earner for us, flattening the mountains and valleys of the cash flow throughout the year. Our shops now turn over about pounds 4m a year or 25 per cent of our European turnover. Retailing may appear to others as an inspired move on our part but we did it the other way round. I started with a shop, then designed a small collection to sell in it. Only then did I become conscious of how important it was for cash flow.

The shops themselves don't follow a plan or any target for achieving a fixed sales per square foot. Where you might expect to find a rack squeezed into another shop you're just as likely to find a sofa, moped or painting. A lot of the things don't turn into money directly but they give people a special feeling about the place which pays off in the end.

The other thing we do is throw in a range of cheap items - perhaps something as daft as a toothbrush, so that we end up with very few people actually walking out without buying anything. It encourages them to come back another time when they may buy some clothes.

Financially we're conservative. There was a time when we could have thought about going public on the USM, but we never aspired to it. We ploughed money back into the business in the form of bricks and mortar - buying our freeholds in Covent Garden and Nottingham - which have made banks comfortable about dealing with us when we need short-term finance.

We've also found the value of treating wholesale customers well during the recession. We've never forced anybody to take a certain amount of stock, which some of our rivals do. The strange thing is it has all worked.

The recession has blighted many companies in the fashion business but we've come through with sales up 24 per cent in the shops and 35 per cent up on wholesale. We've never had a grand master plan dreamed up in an ivory tower. The shops and wholesale operation just grew.

We do have a very focused marketing strategy - we need to with turnover of pounds 54m worldwide and the loyalty of suppliers, customers and 200 employees to satisfy. But we still manage to keep it fairly light-hearted.

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