True Story: Many years ago, I called an optometrist to ask if I could talk to him about his retail business. He very smartly informed me that he did not retail, he dispensed, and he did not sell. OK- but when you are in the business of selling products for a profit, by definition you are a retailer. As much as these might be a nasty words, retail, sell, market- unless you are a non-profit, you sell, market and retail. The other age old excuse, ‘We didn’t learn business while in school’ also does not apply. I didn’t either- but I learned. While it might be somewhat of a hassle to remember some of the below formulas (basic math) learning them and applying the basics to your office will help you in growing your business.
Why is it Important?
- Assists in evaluated inventory purchasing decisions.
- Analyze Sales figures
- Assists in Mark up’s or down and pricing strategies
- Assists in Staff Training
- Measures Sales Performance
- Provides Needed feedback on profit areas and product sales
- Can provide information in developing a Staff Bonus Programs
Although there are computer programs and other tools available, performing these retail math calculations often requires familiarity with formulas. Use the following equations and retail math formulas to track merchandise, measure sales performance and help create pricing strategies. These are not all of the formulas, for more information, buy the book or see below resources.
Common Retail Math Formulas
Break Even Point /Break Even Analysis –The point in business where the sales equal the expenses. There is no profit and no loss.
Formula: Break-Even Point ($) = Fixed Costs ÷ Gross Margin Percentage
- Store buys Lenses for $15 each, marks them up and sells them for $30. Monthly expenses (fixed costs) are $10,000. This means breakeven point would be $20,000 or 667 units.
- $10,000 ÷ (15/30) = $20,000
- $20,000 ÷ $30 = 667
Formula: Cost of Goods Sold (COGS) = Beginning Inventory + Purchases – End Inventory
- Inventory @ cost Beginning of year = $10,000.
- Purchases @ cost + freight During year = $55,000.
- Total available ($10,000. + $55,000.) = $65,000.
- Inventory On Hand end of year @ cost = $45,000
- Cost of Goods Sold ($65,00 – $45,000) = $20,000
Gross Margin Return on Inventory An important tool in analyzing inventory, sales and profitability is GMROI (also known as GMROII) which stands for Gross Margin Return On Inventory Investment. The GMROI calculations assist buyers in evaluating whether a sufficient gross margin is being earned by the products purchased, compared to the investment in inventory required to generate those gross margin dollars.
- 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).
- Find the average inventory at cost.
- Calculate the gross margin of the item.
- Divide the gross margin by the average cost of inventory to get GMROI.
- The result is a ratio indicating the number of times gross margin is earned from the inventory investment.
- GMROI calculation can be used to measure the performance the entire shop, but it is more effective if used for a particular department or category of merchandise.
Inventory Turnover :Turnover is the number of times you sell your average investment in inventory each year. Controlling inventory turnover is the key to keeping shelves stocked with interesting products and keeping the cash flowing. You want to buy the merchandise, move it quickly and then repurchase more products for customers. However, if the turnover becomes too high, sales may be lost because of reduced customer selection
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 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.
- Start with the Beginning Inventory At Cost
- Add Purchases At Cost
- Subtract Ending Inventory At Cost
- Subtract Cost of Scrapped and Lost items (if applicable)
- Divide by the Cost of Sales
- The result is the number of times the average inventory is sold and replaced.
- Inventory turnover can be calculated in whole, as well as by department or merchandise category.
- Inventory turns can be calculated by the month, quarter, season or year.
In order to take advantage of special buys or to add new products, some of the OTB dollars should be held back. This also allows the retailer to react to fast-selling items and quickly restock shelves.
Consider maintaining an OTB plan for your business as a whole, but also plan for each category of merchandise you stock. The plan can be maintained on paper, in a spreadsheet or by purchasing one of the several retail software packages available that contain Open-To-Buy programs.
- + Planned Markdowns
- + Planned End of Month Inventory
- – Planned Beginning of Month Inventory
Sales Per Square Foot Your office has customers steadily coming through the doors, employees are busy and there is the frequent billing and charges, but how well is your business really doing?One simple way to know if business is good, is to compare this year’s same-store sales data to last year’s revenue.
The sales per square foot data is most commonly used for planning inventory purchases. It can also roughly calculate return on investment and it is used to determine rent on a retail location. When measuring sales per square foot, keep in mind that selling space does not include the stock room or any area where products are not displayed.
Total Net Sales ÷ Square Feet of Selling Space = Sales per Square Foot of Selling Space
Sales per Linear Foot of Shelf Space An office with wall units and other shelf space may want to use sales per linear foot of shelf space to determine a product or product category’s allotment of space.
Total Net Sales ÷ Linear Feet of Shelving = Sales per Linear Foot
Sales by Department or Product Category Retailers selling various categories of products will find the sales by department tool useful in comparing product categories within a store. For example, sunglasses can see how the sales of the Children’s compared with the rest of the store’s sales.
Category’s Total Net Sales ÷ Store’s Total Net Sales = Category’s % of Total Store Sales
Measuring Productivity of Staff
These are just a few of the ways to measure a retail store’s performance. As retailers track these numbers month after month and year after year, it becomes easier to understand where the sales are generated, by which employees and how the store’s merchandising can maximize sales growth.It is critical for the success of your business to constantly work towards improving not only the efficiency of employees, but the productivity of the store’s selling space and inventory as well. This can be achieved by using various retail math formulas and calculations based on sales.
Sales per Transaction/Sales Per Customer: Sales per transaction number tells a retailer what is the average transaction in dollars. A store dependant on its sales clerks to make a sale will use this formula in measuring the productivity of staff.
Gross Sales ÷ Number of Transactions = Sales per Transaction
Sales per Employee When factoring sales per employee, retailers need to take into consideration whether the store has full time or part time workers. Convert the hours worked by part-time employees during the period to an equivalent number of full-time workers. This form of measuring productivity is an excellent tool in determining the amount of sales a business needs to bring in when increasing staffing levels.
Net Sales ÷ Number of Employees = Sales per Employee