I worked her numbers the way I always do using my inventory planning solution from Management One. I analyzed her store using their trademarked Fresh Factor. The Fresh Factor is a guide to determine freshness of current inventory. The purpose is to illustrate the importance of having a flow of fresh goods and to see how sales react to the “newness” of inventory. I have used this formula with many retailers as part of my decision process in determining current open-to-receive. It is common for sales to improve as the “Fresh Quotient” increases.

I uncovered areas of profit that could really explode in the next 6 months. We discussed those classes and implemented her open to buy plan. She followed through very well.

The open to buy plan I provided her solves the question of how much inventory to buy and when should the inventory arrive. It is the blueprint that accurately forecasts sales and inventory. It produces a dynamic cash flow management tool and guides me to create a cash flow plan that works for clients. End-of-season markdowns are reduced and stock-outs minimized.

After 6 months, we compared the results from this year to last year. The numbers were fantastic!

$31,262 Sales Increase – I had accurately predicted trends and the client made sure to have the inventory as I had planned so she could maximize the sales in those classes

$18,451 Fewer Markdowns –because I had correctly forecasted the sales and inventory requirements

$11,621 Additional Profit Potential Dollars due to increasing the initial markup over last year

$53,976 NET INCOME INCREASE.

In addition, the client’s cost of goods was decreased by 5.7% according to her financial reports. Let me stress, that this client was already highly profitable! Another way of saying this is that her GROSS MARGIN INCREASED BY 5.7%.

The client is very happy.

Cathy Wagner

(847) 226-1375

Affiliate- Chicago

At the beginning of the season, the buyer must start with an Open To Buy budget to use as a guide for purchases. The budget can be stretched by holding some back to buy off price items as well as potential re-orders, during the season. That is where strategy enters. Planning how much to withhold at the beginning of the season can be a critical decision for the success of the entire season. Adjustments during the season are important but require a view of cash flow and OTB in making those changes. Often the strategy leads to effective negotiations at markets and during initial buys to assure the ability to get the best goods off price during the season.

Buying off price in season is challenging as well. Price should not be the only attraction. An off price buy that cuts into the store’s ability to sell its regular price merchandise can be counter- productive. The buyer should analyze if the merchandise fits the customers’ tastes and the store’s assortment plan. The buyer should determine if the purchase is something that would have been made at full price at the beginning of the season. Just because the price is low does not mean it is a good buy. It needs to sell. An added benefit to the purchase would be if the item drives sales of the other regularly priced merchandise. A good question to also ask is “Can the goods be brought into the store at the full price before issuing the markdowns?”

A further question is what do I do as the season progresses? Have my sell-throughs been weaker than expected and do I already own my own markdowns? Will an off price buy help my margins offset an erosion in my margins or be a potential drain on cash flow? Should I take the hit on my own goods and move on to the next season?

An additional strategy is to blend both regular goods and to sprinkle buys in from the Management One® Buying Service (MBS –exclusive to M1 clients) or to buy more opportunistically as you develop your assortment strategies.

There are a lot of variables to consider as you look to build your merchandise plan for the season.

Everything in retail becomes more complicated and interconnected as you continue to grow your business. The more guidelines that can be established, the easier and more profitable the journey becomes!

1. Net sales- the amount of sales during the reporting period. This amount reflects the total value of merchandise sold to your customers. Markdowns are subtracted and sales tax is not included in Net Sales. Some other caveats to remember is that gains or losses from investments or from charging customers for alterations are not included in Net Sales. This income is added below as Other Income. Also, Net Sales assume an accrual basis for accounting. For example, if an item is sold on a house charge that item is included in Net Sales even though the revenue has not been fully collected. Should the monies never be collected then that becomes an expense when it is determined uncollectable.
2. Cost of Goods Sold- this is sometimes referred to as Cost of Sales. Cost of Goods Sold is what it actually costs a retailer for the goods that he sold during a given period. The correct formula for determining Cost of Goods Sold for merchandise is:a.Beginning inventory at cost
   b.+Purchases at cost
   c.-Ending inventory at cost
   d.=Cost of good sold

   Accountants will also include freight-in, as Generally Accepted Accounting Principles requires that this expense directly related to bringing the merchandise available to sell be included. Cash discounts are often also reflected as a separate line item in the Cost of Goods section of the financial statement as a reduction in purchases. This is particularly true for retailers who include discounts when determining initial mark up. Generally Accepted Accounting Principles for publicly held companies requires that they be reflected as a credit expense or other income as a line item on the income statement. In smaller companies cash discounts and incentives are immaterial and their placement on the financial statement is at the discretion of the owner. It is important that whatever is included be consistent over time.

3. Gross Profit- Net Sales minus Cost of Goods Sold. This is the money that is available to pay other expenses, bills, salaries, taxes and profits.
4. Total Operating expenses- A list of all your expenses- occupancy, salaries, selling, general and administrative expenses. A dividend or distribution that the owner takes is not included in operating expenses.
5. Net Profit/(Loss)- Gross Profit minus operating expenses. This is what is available for dividends, debt reduction, or dollars to reinvest in the business.
   Inventory ValuationCut off procedures for purchases to collect all receiving within a given period

   Omission of purchases awaiting invoices from vendors

   Returns of merchandise to vendors or from customers not recorded or included.

   Net sales not recorded due to different procedures like lay-a-way and special orders.

   Unrecorded transactions for transfers of merchandise

   Unrecorded invoices for merchandise

   Overages, Shortages, or theft unrecorded

   Promotional sales not recorded when sold

   Gift certificates, payments in advance, or credit not posted or not recorded correctly.

   Damaged merchandise not reflected

   Sales tax included inaccurately.

Sometimes financial statements will calculate Cost of Goods Sold strictly as purchases for the period. It is not quite that simple. Cost of Goods Sold is based on goods available for sale during the period that is being reported. Goods available for sale includes beginning inventory as well as merchandise purchased during the period reviewed. Simply stating purchases instead of an accurate Cost of Goods Sold calculation does not take into account beginning and ending inventory. For example, merchandise theft impacts profits by raising Cost of Goods Sold. The merchant pays for goods whether they are stolen or given away. This is reflected in the difference of beginning and ending inventory and the accurate reflection of these transactions would boost the Costs of Goods Sold. Showing only purchases as Cost of Goods Sold distorts the profit and would result in decisions, like income taxes to pay on a less accurate measurement.

How inventory is valued with the different acceptable methods, like LIFO, FIFO, or Average Cost can have a direct impact on your financial statement. (We will examine this in greater detail in our November issue)

The accuracy of your financial statement’s Cost of Goods Sold should be gauged each time you review it by examining the related percentages in comparison to prior periods and your knowledge and experience. Reflecting Cost of Goods Sold accurately on a financial statement is critical to its overall accuracy.

The first litmus test on the accuracy of a financial statement is the Cost of Goods Sold. Its accuracy provides the level of confidence in the exactness of the overall bottom line.
Here is a short list that can go wrong:

This November we will be taking a look at inventory valuation in greater detail. The timing of this information comes at a critical time in management’s decisions to use correct valuation decisions for year-end statements that could benefit tax situations.