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
(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
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.