Page 147 - DMGT554_RETAIL_BUYING

Retail Buying

Notes 10.3 Merchandise Budget Plan

Merchandise budget plans are concerned with the financial planning of merchandise ranges,
rather than the control of the physical number of items. For any retailer (of any size) it is vital
that a balance is achieved between the amount of money going out of a business to pay for
supplies of stock, and money coming into the business from sales to customers. Even though
there are various accounting methods that allow a little flexibility (for example, extended credit
terms), this balance is key to the liquidity of the business. A merchandise budget plan is difficult
to accomplish without the benefit of previous experience and internal records; however, relying
on historical data alone can lead a buyer or product manager into repeating previous mistakes,
including missed opportunities.
The first step of the plan is a realistic sales forecast, the principles of which were discussed
earlier. The time period for the plan will vary according to the individual needs of the retail
business, but a six-monthly plan is common for many seasonal products. The sales forecast
shown in table given below is for a relatively seasonal product-women toiletry gift pack. The
sales are above average in January, because of all the reduced Christmas stock, in March because
of Mothers Day and Easter (which usually fall in this month), and in June due to pre-holiday
purchases. The forecasted sales are shown as a percentage of the total seasons sales estimate, and
at retail selling value.

Table 10.2: Planned Purchases

The second step of the plan is to consider how much stock is needed in the stores in order to
achieve the forecasted level of sales. Arriving at this stock to sales ratio will need consideration
of the following:
1. How fast can replacement items be supplied?

2. How fast will the item sell out, and how important is it to keep the product in stock?
3. How much choice does the customer expect to find in the store, in order to make a purchase?
For a relatively slow selling, specific product item that can be restocked by a local distributor
(for example, power tools), the stock to sales ratio can be kept low; but for party dresses, where
lead-times might be three weeks or more and customers require an extensive selection of styles
and sizes to choose from, the stock to sales ratio needs to be higher. Usually these factors are
considered collectively for the category of merchandize being planned, and an average stock to
sales ratio is arrived at for the planning period. Thus, an average ratio of 2 might be sufficient for
power, tools, but may be as high as 10 for party dresses. This average is then raised or lowered
through the selling season to reflect the effect of differing sales rates on the stock position: when
sales peak, the stock runs down quickly and the stock to sales ratio drops down from the
average; but when sales are slow, the stock to sales ratio rises. For seasonal goods it might be

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