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Apart from above below are some very important formula’s to keep close eye on inventory
& productivity
Acid-Test Ratio
Average Inventory
Break-Even Analysis
Contribution Margin
Gross Margin
Initial Markup
Maintained Markup
Margin %
Markup
Percentage Increase/Decrease
Quick Ratio
Reductions
Sales per Square Foot = Total Net Sales ÷ Square Feet of Selling Space
Sell-Through Rate
The sales per square foot data is most commonly used for planning inventory purchases. It can also
roughly calculate return on investment and it is used to determine rent on a retail location. When
measuring sales per square foot, keep in mind that selling space does not include the stock room or
any area where products are not displayed.
Total Net Sales ÷ Square Feet of Selling Space = Sales per Square Foot of Selling Space
A retail store with wall units and other shelf space may want to use sales per linear foot of shelf space
to determine a product or product category's allotment of space.
Total Net Sales ÷ Linear Feet of Shelving = Sales per Linear Foot
Retailers selling various categories of products will find the sales by department tool useful in
comparing product categories within a store. For example, a woman's clothing store can see how the
sales of the lingerie department compared with the rest of the store's sales.
Category's Total Net Sales ÷ Store's Total Net Sales = Category's % of Total Store Sales
Also known as sales per customer, the sales per transaction number tells a retailer what is the
average transaction in dollars. A store dependant on its sales clerks to make a sale will use this
formula in measuring the productivity of staff.
When factoring sales per employee, retailers need to take into consideration whether the store has full
time or part time workers. Convert the hours worked by part-time employees during the period to an
equivalent number of full-time workers. This form of measuring productivity is an excellent tool in
determining the amount of sales a business needs to bring in when increasing staffing levels.
These are just a few of the ways to measure a retail store's performance. As retailers track these
numbers month after month and year after year, it becomes easier to understand where the sales are
generated, by which employees and how the store's merchandising can maximize sales growth.
The above formula is an example of a company that sells finished goods. The formula can be
applied to one week, one month or a year, but must be the same for each value of the formula.
The formula for a manufacturer includes raw goods and unfinished product in inventory. There
is no formula for a service firm, which relies exclusively on market research of competitors and
deciding a pricing strategy that allows profitability.
Here is another way of stating the same formula:
inventory at beginning of year + purchases or additions during the year = goods available for sale
- inventory at end of year = cost of goods sold
Last August the stores sales were $ 1,814,476, beginning inventory was 4,875,911, and ending
inventory was 4,693,452. August maintained a mark-up of 28%.
The formula for reaching the ROI in this scenario would be as follows.
You can calculate the percent of change (percent of increase or percent of decrease) from the
following formula.
This Period of Sales - Last Period of Sales / Last Period of Sales x100% = percent of Change
Example, Apparel Search sold $1500. worth of blue shirts last year. This year we sold $1575. worth of
blue shirts. What is the percent of increase on the blue shirts we sold?
Example, A shirt on ApparelSearch.com is sold at a 20% discount off the original price of $32. What is
the Sales Price?
$32-X = $6.4
X = $25.6
Example, The original price of a leather jacket was $500. It is now on sale for $440. What is the percent
of decrease?
X/100 = (500-440)/500
500X = 6000
X= 12
It is calculated by dividing the number of units sold by the beginning on-hand inventory (for that
same time period).
Example:
During the month of August you sell 100 shirts. You received 300 shirts in receipts. You
end August with 900 units shirts of stock (End of Month Stock). What was your Beginning On-
Hand units of shirts and what was your Sell-through?
Beginning of Month stock (BOM) = EOM 900 units - Receipts 300 units + Sales 100 units = 700
units
Sell-through = Sales 100 units / Beginning Inventory (BOM) 700 = 14.3% Sell-through
in August.
"inventory turnover." Turnover is the number of times you sell your average investment in
inventory each year.
Cost of Goods Sold from Stock Sales during the Past 12 Months
Average Inventory Investment during the Past 12 Months
Inventory turns : The retail sales for a period divided by the average inventory value for that period. Most
retailers are in the range of two to four turns a year.
Average Stock = sum of each periods Beginning of Period stock + the last End of Period
stock / # of periods
Breakeven Analysis: Simply stated, this formula indicates how much sales volume must be
accomplished in order to cover all costs (fixed and variable), and begin generating a profit. In
other words, it is the point in sales volume at which you have no profit and no loss. This is most
commonly applied to a business that sells product.
Weeks of Stock
If you have $10,000. worth of inventory in sweaters, and your total sales of sweaters for the past
5 weeks is $20,000. the calculation would look as below :
This means that if you did not replenish your sweater inventory and sales continued at the same
rate, you would deplete your inventory of sweaters to zero within 2 1/2 weeks.
By the way, what are the odds that the your inventory would sell at the "same rate" week after
week. Maybe this is why clothing stores are always out of my size ...
Gross Margin:
Example: You sold an item for $49.95, and the cost of the item is $30.00.
Mark Up:
There is dispute among segments of the retail industry as to the retail math terminology
and calculations used in the business. There is definitely a need for a "common language"
for the industry as it pertains to calculations and terms!
But, the following list of 15 different retail math formulas and explanations is the most
common. It is the "language" used by The Hallman Company in working with our clients in
formulating and guiding them in implementing their retail business strategies:
Example: $100 retail item with 56% markup has a cost of $44
Note: This retail math formula is useful for calculating the most you
can pay for an item you need to retail at $100, but want a markup of 56%.
Use this retail math formula in cost negotiations with vendors.
(2) Cost of Goods Sold (COGS) = Beginning Inventory + Purchases - End Inventory
inventory at beginning of year + purchases or additions during the year = goods available
for sale - inventory at end of year = cost of goods sold
Note: This retail math formula is used to determine the retail price to mark an item, when
the cost and the desired markup % is known.
Example: Cost on an item is $44. Desired markup is 56%. 100% - 56% = 44% cost
complement to the retail markup. Cost $ of $44 is divided by cost complement of .44 to
arrive at target retail price of $100. ($44 divided by .44 = $100)
Example: Original retail price $100. New lower price $80. The markdown is $20. This 20%
discount becomes an markdown expense of 25% because the $20 must be divided by the
$80 sale to be expressed as a % to sales, the way other expenses are expressed as a % to
sales.
(6) Gross Margin = Sales - cost of good sold (Maintained Margin, supposed referred to as
Gross Margin, is the initial margin or markup less the cost of markdowns at cost.)
Example: $100 retail - $44 Cost = difference of $56. The $56 divided by $100 = 56%
Example: $20 markdown divided by $80 net sale = 25% retail markdown expense.
(9) Markup = The difference between the cost of an item and its selling price. This is the
initial markup, or initial margin, before the impact of markdowns.
A merchant's job is to turn the inventory often, while preventing the depreciation of the
initial markup.
(10) Percent change in sales = This period of sales - Last period of sales / Last period of
sales
Example: This period sales = $1,000,000. Last period sales = $900,000. $1,000,000 -
$900,000 = $100,000 increase. Increase of $100,000 divided by last period sales of
$900,000 = 11.1% increase.
Note: B.O.M = beginning of month inventory. This is one retail math formula which can vary
- many companies look at cost inventory- not retail, when computing turns. We recommend
retail inventory management.
Example: As in example above, a B.O.M. stock of $400,000 retail divided by that month's
sales of $100,000 = a stock to sales ratio of 4.0 to 1. ($400,000 divided by $100,000).
(13) Shrinkage = Difference between book and physical inventory. This is an "unknown"
loss. A markdown is a loss, but if it is recorded, it is a known loss, not shrinkage. If an item
is broken or otherwise damaged in stock and disposed of, and no markdown is recorded, it
becomes an "unknown" loss, and is reflected as a mysterious "shrinkage" in the inventory.
Theft, of course, is unknown or unrecorded loss, or shrinkage.
(14) "inventory turnover." Turnover is the number of times you sell your average
investment in inventory each year.
Turnover = net sales for period / average retail inventory for period. The "period" should be
for at least 12 months.
Inventory turns : The retail sales for a period divided by the average inventory value at
retail for that period. Most retailers are in the range of two to four turns a year. Properly
prepared Inventory Plans will significantly increase your turns and decrease your average $
tied up in inventory, while increasing your profits and boosting your cash flow.
At The Hallman Company, we urge our clients to express inventory turnover at retail, not
cost. It is relatively easy to speed up inventory turns at cost- just mark everything down to
cost, sell it at cost, and you can "sell through" many more times during the period. But we
must not only increase turnover, we must at the same time protect the markup.
(15) Breakeven = Fixed Costs $ / (Net Sales - Contribution Margin %) Note: The
Contribution Margin % (CM) is the sum of the Variable Expense % + Cost Of Goods Sold %
after the impact of markdowns.
Breakeven Analysis: Simply stated, this formula indicates how much sales volume must be
accomplished in order to cover all costs (fixed and variable), and begin generating a profit.
In other words, it is the point in sales volume at which you have no profit and no loss.