September 9, 2014
5 Need to Know Retailing Financial Concepts
While you don’t have to be an accountant to be a retailer, it doesn’t hurt to have an understanding of some key financial tools. Here are some of the most important to keep in mind.
1. Cost of Goods Sold
The cost of goods sold (COGS) is what it costs you to stock items. That can include freight, handling charges, special taxes and the cost of the merchandise itself, but nothing else.
To determine your COGS, take your beginning inventory, add purchases made at your determined start of period being measured (monthly, quarterly, annually, etc.), plus purchases during that period, then, finally, minus end of period inventory.
2. Inventory Turn Rate
Your inventory turnover shows how many times your inventory is sold and replaced over a period of time, normally per year. A low turnover implies poor sales. A high ratio generally means strong sales, although it can also be an indicator of poor purchasing or inventory control. To calculate your turn ratio, divide your annual cost of goods sold by your average inventory—the total of the 12 end of month inventory numbers divided by 12—at cost. According to industry standards, the accepted goal is to work for three to five turns per year.
3. Markup Versus Margin
Markup is the actual difference between the cost of the product and its selling price. In its simplest example, you buy a product for $1 and sell it for $2. In this instance, to determine your markup, take the $2 selling price, subtract the original $1 product cost, and divide it by the $2 retail. In this example, that would equal .5, which is a 50 percent markup.
Margin, on the other hand, is a function of selling price and is the percentage difference between your selling price and the gross profit. If the product costs $1 and you sell it for $2, you will make $1. The $1 profit divided by the $2 selling price equals .5, meaning you have a 50-percent margin.
4. Gross Margin Return on Investment (GMROI)
GMROI shows how many gross profit dollars are produced for each dollar of inventory you’ve invested in and sold over a certain period of time. If you buy something for $1 and sell it for $2 (FYI: an intentional doubling of the cost of a product to arrive at the selling price is known as “keystoneing”), you have a GMROI of $2. The higher your GMROI the better.
GMROI is calculated by dividing your annual gross profit by your average inventory at cost. It is one of a retailer’s most valuable tools, in that it allows you to measure the profitability of specific SKUs, a category of products, or even your entire stock and, combined with inventory turns and sales information, knowing this number/s can help increase your net.
5. Expenses as a Percentage of Sales
This provides a framework to determine if your expenses are on track. Calculate your total sales for a specific period, then do the same for your total expenses for that same period. Dividing your total expenses by the total sales revenue for that same period of time gives you a percent of expenses to sales. You can do this for all sales and expenses or break it down into specific categories.
About the Author
William F. Kendy is a well-known firearms industry writer, speaker and marketing, advertising, sales and customer service consultant. He has written for SHOT Business, Range Report, Shooting Sports Retailer, Fishing Tackle Retailer, Advertising Age, among other publications. He also works closely with the NSSF on presentations at SHOT Show University and SHOT Show Retail Seminars, and he’s also hosted a number of videos and webinars on the NSSF website.