## Retail Math Formulas

There is dispute among segments of the retail industry as to the retail math formulas, 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.

Here are the “top 15” retail math formulas:
(1) \$ Cost = \$ Retail x (100% – Markup %)

Example: \$100 retail item with 56% markup has a cost of \$44
\$100 retail X .44 = \$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 – Ending  Inventory.

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.

Example: Inventory @ cost Beginning of year = \$1,000,000.
Purchases @ cost + freight During year = \$550,000.
Total available (\$1,000,000. + \$550,000.) = \$1,550,000.
Inventory On Hand end of year @ cost = \$900,000.
Cost of Goods Sold (\$1,550,000 – \$900,000) = \$650,000.

(3) \$ Retail = \$ Cost / (100% – markup %)

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)

(4) \$ Markdown = Original retail price – lower retail price.
Example: Original retail price \$100. New lower price \$80.
The markdown is \$20. This 20% discount becomes a 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.

(5) GMROI (Gross Margin Return On Investment) = Gross Margin \$

Example: Annual Gross Margin \$ of \$400,000 with an
average inventory cost of \$150,000 would have a GMROI of \$2.67; in other words, for each dollar invested in inventory on
average, the \$1 invested returned \$2.67. (\$400,000 divided by \$150,000.)  This is a particularly important retail
math formula. (Most retailers do not pay enough attention to GMROI).

(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.)

(7) Margin % = (\$ Retail – \$ Cost) / \$ Retail
Example: \$100 retail – \$44 Cost = difference of \$56. The \$56
divided by \$100 = 56%

(8) Markdown % = \$ Markdown / \$ Net Sales

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.

The NUMBER ONE cause of excessive markdowns is
OVER_BUYING! Proper inventory planning, as provided for you
by The Hallman Company, will prevent over-buying.

(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.

(11) Planned Stock = planned monthly sales x stock sales
ratio .

Example: Planned monthly sales of \$100,000 X planned stock
to sales ratio of 4.0 = a planned first of (planned) month inventory of \$400,000. Averaging a 4 to 1 stock to sales
ratio each month (4 months supply on hand) will result in achieving retail inventory turns of 3 per year.

(12) Stock to Sales Ratio = B.O.M. \$ Stock / Sales for period
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 for management accounting, Cost inventory for financial accounting.

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.

Here is another way of stating the same formula:
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. “Seeing” the retail values helps us more effectively manage the erosion of initial 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.

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## The Science of Retail Success

So, just what is “the science of retail success”?

Successful retailing is the business of the buying, and the selling, of goods- for profit. Maximizing the effectiveness with which you complete each step of this cycle is critical to your success. Your continued growth hinges on completing each step better each day, each week, each month, each season. Success guru Tony Robbins calls this CANI (prounced Ka Nie’)- an acronym for Continuous And Never-ending Improvement.

The business. The buying. The selling. The profit. Examining each of these components and setting key performance indexes (KPI’s) for each of them is the first step. After that, you must measure and monitor each performance index for improvement,  and adapt your actions as needed. Then, rinse and repeat- continuously.

Helping you to achieve all of this- providing you with the expertise, and the tools, is what we do when we help our clients implement the science of retail success. We help you to see where you are now. That is the starting point. From there, we help you to implement tools and processes to see where you are going- and we help you to get there.

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## Are your salespeople driving business- or just along for the ride?

Which drives retail business most – People or Inventory?
Sure, you buy great looking merchandise.
But, assuming you purchased your merchandise at the right price, the right amount for each classification and the right delivery time, your sales process is just getting started. There are few secrets in retail. Your competitors probably have very similar merchandise.

Fortunately, 80% of the reasons someone will shop in your store is because of other factors. The key is to develop the other 80%.
A big chunk of that other 80% is your salespeople.
Chances are, unless you are a popular-price mass merchant, you have people on the payroll who were hired in as salespeople, not clerks. Just as no specialty store owner today can open the door and wait with arms folded for customers to walk in, neither can we afford salespeople who do not generate business.  The salesperson who only serves customers who walk into the store are like taxi drivers who only carry you part of the way to your destination.

The role of the salesperson today has changed from communicating value to the customer to creating value for the customer. (And that doesn’t mean giving unauthorized discounts!) It means finding out what it is that customers value, and then creating ways to provide it through the store and its products.

If your customers value TIME, the winning salesperson will find a way to save them time.
If your customers value RELATIONSHIPS, the winning salesperson will develop and maintain a relationship with them.
If your customers value CONVENIENCE, the winning salesperson will find ways to make it more convenient for them to do business with the store.
Winning salespeople also constantly look for ways to improve their personal professional performance. They constantly track their percentage of sales to walkouts; items per transaction; and average \$ customer sale. They are always “prospecting” for new customers – they hang out where their prospective customers hang out; join networking groups and attend Chamber of Commerce and Merchants Association meetings. They have a “can do – will do” attitude.
A wonderful example is “JP”, a salesperson for one of the country’s leading bicycle retailers.

JP was on a ride with a local Women’s Riding Club and was injured in a spill from her bike. The result was a nasty gash in her thigh that required about 23 stitches. The doctor told her to stay off her feet for a few days to give the wound time to heal.
Laying around and doing nothing isn’t JP’s style.

She asked the owners of the store if she could have a list of the customers who had bought bikes over the last 90 days so she could call them from home and invite them to come in to the store for their free 90 day safety inspection and adjustment. All of them appreciated the follow-up, and most did bring their bikes in. A majority asked when she expected to be back at work, and they waited to come in after she returned, so that she could work with them personally. Quite a few happily bought additional items while they were in – generating over \$2300 in additional business!

Since that particular store has been a client of mine for several years, I know JP and the rest of the team pretty well. When JP won my “Team Member of the Year Award” , she wrote me a letter, thanking me for the award. In it, she made the following comment: “I thank God every day for my wonderful job, and for the people I am surrounded by.”

So, how do you know who the star sales performers are? Or the weak ones? The most common way is to track their individual sales and measure their productivity.
Productivity is measured by dividing their earnings by their sales.
For example, a salesperson earning \$35,000 per year, with annual sales of \$350,000 is producing \$10 in sales for each \$1 paid. That person costs you 10% of their sales.

A salesperson earning \$2000 per month, and producing \$15,000 per month in personal sales, is costing you 13.3% (\$2000/\$15000).
A “rule of thumb” for most types of retail operations is a salesperson should cost you no more than 10%. In other words, they should be producing sales on a 10 to 1 ratio to their pay.
Salespeople who are costing you 7.5% or less should probably be raised, either in base pay or in commission rate.
Those costing you 7.5% to 10% are average producers, earning their paycheck.
Those costing you 10.1% to 14.5% need to improve their skills. You should consider coaching and additional sales training for them.
All other things being equal, any salesperson costing you more than 15% should be replaced.

Remember- successful retailing is the business of the buying- and the selling- of goods, for profit. The “science of retail success” is defining key measurements to monitor, measure, and adapt as needed, to be sure that full cycle is effectively completed.

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## Inventory turnover-it’s enough to drive you BANANAS!

(Typically, the phrase “going bananas” means that someone is “very frustrated”, or maybe even “gone crazy”. I don’t know how bananas got hung with such a rap as this, but we can use this humble fruit to defuse some of the confusion on this whole issue of “inventory turn”.)

Ok, since someone mentioned bananas, let’s talk about bananas.

Bananas are an interesting fruit- they come in their own ziplock covers, and they are good for you. I personally love to eat bananas. So do a lot of other people.

So, to better understand what inventory turn means,and also to help answer the question of “How do you do it?” let’s go into the banana business together…

Let’s say we own a little fruit stand, and from this fruit stand we sell bananas. We buy our banana stock from a local wholesale market. We pay 50 cents for each banana, and we sell it to our customers for \$1.00.

We sell, on average, 100 bananas per week (remember, it’s a small fruit stand). So, bright and early, each Monday morning, before our stand opens, we go to the wholesale market, show our ID cards to prove we are real-life retailers and have a right to buy at this wholesale market, and we buy our 100 bananas.

We pay \$50 for these 100 bananas. Our inventory investment in these 100 bananas is \$50.

We work hard for six days, and by Saturday night, we have sold all of our bananas. We made a \$50 profit on our \$50 investment.

We turned (bought and sold) our inventory of bananas one time that week.We take Sunday off- we deserve the rest!

Now, we begin to exchange notes about our business – how can we do more business? “Well,” you say, “almost every customer who comes by the stand to buy bananas asks me if we carry apples. I think we could sell some appes, if we had them.”

We decide to do some high-tech market research.

All the following week, whenever anyone asked us about apples, we put a hash mark on a sheet of paper. By doing this, we determined we could sell at least 50 apples per week. We can get the apples for 50 cents each, and sell them for \$1.00, just like the bananas.

We only have one problem. We don’t have an extra \$25 to buy the 50 apples.

We only have \$50, and we need that \$50 to pay for our 100 bananas. All the meager profit we make each week goes to pay the rent on the fruit stand, and for us to live on.

We think about borrowing the extra \$25 from your Mom, but you don’t want to ask her – and she doesn’t like me at all!

Oh, what can we do?

“Eureka!”, you exclaim. “I know what we can do! This Monday morning, we’ll go to the market as usual, but instead of buying 100 bananas, we’ll only buy 50 bananas. With the \$25 we save, we’ll buy our week’s supply of apples!”

“But if we only buy 50 bananas, we’ll run out of bananas”, I note.

“Not really”, you say, “because we’ll make an extra trip to the market Thursday morning, and with the money we made from selling all 50 bananas and half the apples the first half of the week, we’ll buy the other 50 bananas we’ll need for the second half of the week”.

So, that’s what we do, and of course, here is what happened:

Rather than investing \$50 once per week to sell the 100 bananas which brings us a \$50 profit, we invest only \$25 to buy 50 bananas, we sell those for a \$25 profit, get our original \$25 back, and then re-invest it in another 50 bananas which we sell the other half of the week.

Now, we are making the same \$50 banana profit on a \$25 investment because we buy 1/2 the bananas twice as often during the week. With the other \$25, we buy our week’s supply of apples. By selling the apples, we make another \$25 profit.

So now, our same \$50 invested in fruit is returning us a profit each week of \$75, rather than \$50.

That is what inventory turn is all about: buying, selling, and rebuying the inventory more often during the same time frame.

And, it won’t take us long to realize that we don’t really need to buy our entire week’s supply of apples all at one time, either.

Note: To improve your fruit stand’s inventory turn, it is vital, even critical, that you know how many bananas you can sell per week. And apples, and maybe even oranges.

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## DON’T LET THIS BEAST EAT UP YOUR PROFIT!

Even the most successful retailers can fall victim to this vicious predator. He is the Markdown Wolf!

The Markdown Wolf normally attacks at the end of the season. You see his tracks in the carnage of red “sale” tickets and in slashed prices. But, he began stalking you months before!

He hid under the cover of “slow traffic”. He watched as you ventured to market and he sneered as you knee-jerked from one ad campaign to another. He drooled as your new inventory slowly grew older, weaker. You heard him howling…but there was little you could do!

The most common cause of excessive markdowns is over buying. Over buying is simply buying more than you can sell profitably during the season. No one does this on purpose, of course. You need a buying plan- one based on a solid forecast of sales for the upcoming selling season. Don’t rely on “last year”- since last year was rarely ever perfect for anyone, why repeat it? Instead, forecast the future- and buy that amount. How? Well, your customers are telling you now how much they are inclined to buy from you in the future. You just need to learn how to listen!

We can help! Since 1989, we have brought “big business” services to independent retailers. If it’s a jungle out there, don’t you need all the weapons you can get to help you survive – and thrive?

Successful retailing is the business of the buying and the selling of goods for profit. We help our clients complete this full cycle more effectively.