Page 80 - DMGT553_RETAIL_STORE_MANAGEMENT

Unit 5: Retail Arithmetic

advanced retail math skills. Use various retail math calculators and formulas to calculate gross Notes
profit margins, cash flow, start-up costs, break even analysis, retail profitability, and dollar
planning and control.
To discuss the retail concept of margin it is important to have a few definitions under our belts
first. For starters:

Cost: Cost of Goods (COG) is what you pay the vendor for products.
Retail Selling Price: Retail Selling Price of Merchandise is what your customers pay the
store for these goods.

Initial Margin: Initial Margin is the difference between retail and cost (Retail – Cost =
IM$), expressed as a percentage of retail.
So, if you buy a shirt for $3 and sell it for $7, your initial margin is $4 or 59.1%. If you (like me)
didn’t pay attention in ninth grade algebra, let me give you a quick update. In retailing there are
three ingredients needed to figure out what your margin is and what the margin should be. If
you know two out of three, calculate the third. Then, you can decide whether or not what you
have to pay fits into your business plan.

Let’s run through a few examples.
When cost and retail are known (and you want to find out what your margin percentage
will be):

Retail – Cost = Initial Margin % retail

Example: If you buy a lamp for $6 and it retails for $10,

Initial margin % is 10 – 6 = 4 = 40%
When cost and margin percentage are known (and you want to figure out what the retail
should be):

Retail = cost (100% – margin %)
When retail and margin percentage are known and you want to find out what you can
afford to pay the vendor, the calculation is Cost = Retail (100% – margin%)

5.2.1 Inventory Turn

Turnover of inventory, or turn, is the calculation of how many times you sell and replenish the
merchandise in your store over the course of a year.
To figure out your turn, divide your annual sales by your average inventory (at retail). For
instance, if your sales are $400,000 for the year and your average retail is $100,000, your turn is
4. The more times you can turn over your inventory, the better it is because:

You will have less old merchandise.
You will have more opportunities to buy, which should lead to better buys.
The inventory will be more up-to-date.
Less money will be tied up in inventory.

You’ll make more profit on your invested capital. (If you need $100,000 of inventory—tied
up capital—to feed $400,000 worth of sales and profits, you’re obviously better off than if
you need double that inventory for the same results.)

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