Application of Business Math Inventory Turnover

BMAL340 Week Four – Application of Business Math Inventory Turnover, Receipts, Stock, Projections, Item Gross Margin In previous weeks, we worked with business math formulas to calculate category performance metrics. This week will focus on evaluating product category projections. We will start with unit planning. The concept of developing a unitbased plan is called “bottom-up planning” because the plan rolls-up, into an overall financial plan for a product category. Buyers need a complete unit plan before they decide what and how many products to buy for their category. Following are questions that need to be considered when creating a plan: • • • • • • • • • • How many units did we sell? What was the average retail price? What was the average margin %? What was the average markdown rate? How profitable were the items last year? What do we think we can sell this year? How many items will we need to buy in order to support targeted revenues? What is our targeted margin? What are the fundamental assumptions that are driving our revenue projections? What is our exit strategy for the product if it doesn’t sell as projected? Buyers build these bottom-up plans by projecting daily sales, markdowns, receipts, and profitability with cumulative numbers spread over weeks, months, and finally into the season. Buyers monitor and react to sales on a daily basis. They closely analyze those sales results against the plan they have created. From that they can determine what should be adjusted to meet or exceed planned objectives. Sales results can be above Plan, on Plan, or below Plan. Businesses often experience varied sales results that are above, on or below Plan. Let’s take a look at some situations that may have an effect on whether a business’ sales are above or below Plan. • Above Plan – May result from focus periods, product launches, or sales promotions: Promotions drive customer traffic with opportunities for up-selling and add-ons. • • • • Below Plan – May result from inadequate inventory: Inaccurate projections for number of items or out-ofstocks, resulting in not enough products available to sell to customers. On Plan – Execution of Merchandise Strategy: Results from well-displayed, informative merchandising and adequate product inventory to meet customers’ needs. Above Plan – Consultative Sales/Suggestive Selling: Customers purchase the right products with up-sells and add-ons. Below Plan – Low NPS scores: Poor customer service affects revenues and YOY growth. It’s also important to consider the possible results from being over or under Plan. • • • • Above Plan may result in Poor Customer Service: Business may become too busy to handle all customers in a courteous and prompt manner. Below Plan may result in employee Layoffs: Cost cutting may be required. Below Plan may result in Excess Inventory: Overstock or reduced demand for basic or seasonal items. Above Plan may result in Continuous Replenishment of Basic Items: Planning accurate product unit needs. Consider the internal or external factors that could make an impact on the sales plan. Business managers have little to no control over external situations, but they can plan ahead, manage internal situations, and anticipate potential setbacks. What does being on Plan mean? On Plan means that you have accurately predicted sales based on all the factors you need to consider when developing a plan, and you are meeting your revenue goals. You always want to maximize sales, but there are a variety of factors to consider. If you sell more and go above plan, you may have a very busy business, in which case you will need to prepare for that situation. You would need to evaluate areas such as staffing and inventory levels. Developing a thoughtful plan and re-evaluating and adjusting the plan can help promote the success of sales and profit results. If a business is below plan, what steps might a manager take to improve results? There are a number of possibilities. Maybe you are not appropriately displaying your products. This can be especially true for promotional items. What about the expenses? Are they being carefully monitored? Is there sufficient advertising to promote customer interest and potentially increase demand for advertised products? Do promotional or sale products entice customers into the business where they might purchase other products? Are you managing markdowns effectively? Are you being careful about returns and refunds? Finally, are you checking out your competitors? What is their pricing? What kind of promotions are they running? How are they presenting and promoting their products? • • • • • • Improved displays Monitoring expenses Advertising Promotional/Sale products Managing markdowns Competitors’ pricing, promotions, merchandising Let’s go back to business math and the concept of bottom-up planning to examine the following scenario. The Buyer for a custom closet merchandise category is determining what the assortment should be based on the targeted sales and margin % goals. The margin % measures how much of every dollar in sales you keep after paying for the cost of goods sold (COGS). The Buyer must look at the individual items in the assortment in order to determine the margin % and project sales until they roll up to the projected total. For this example, the targeted sales goal for the quarter is $140,000 and the margin goal is 53.5%. Following are explanations for the column headings shown in the above example: • • • • • • • • Proj Order Date: Projected date that the Buyer will send the Purchase Order. Proj Rec Date: Projected date that goods will be received in the business location(s). Cost: Unit cost per item. Retail: Retail price for each item. Margin %: To determine the margin percentage, you divide gross profit by revenue. Unit: Number of units to be purchased. Total Cost: Total cost of goods purchased. Total Retail: Total units sales in dollars. What conclusions can be drawn from this projected assortment plan? There is no exact answer for these projections. The Buyer always starts with a targeted sales plan and Margin % goal. The challenge for the Buyer is to project the Margin % to meet the goal, and not mark the items too high or too low, but as close as possible to achieve the targeted sales goal and meet and exceed the profit goal. This is an ongoing analysis that the Buyer uses to run an effective business. The next step for the Buyer is to project how many products/units will sell daily, weekly, and by month. Let’s take a look at the Buyer’s projections regarding expected unit sales for a three-month period. The Buyer needs to project the sales per month. In this case, last year’s Sell-Thru % is used to calculate unit and sales dollars for each item, which then roll-up to a total sales figure. Using the spreadsheet as a guide, the Buyer starts with historical sales data from the same time last year. Last year during month one, there was a 22% Sell-Thru for the first item in the assortment. Notice that 352 is 22% of 1600 total units for brackets. In month two, the Buyer is projecting 480 units (30% Sell-Thru) and in month 3 the Sell-Thru % is 27% or 432 units. The sales are projected for three months for every item in the assortment. That seems straightforward, but the Buyer is not finished planning yet. The Buyer will need to first develop an exit strategy for the residual stock, determine markdown %, when the markdowns will be taken, and how many units will be marked down. The Buyer will take a 25% reduction for the first markdown and 50% reduction for the second. The Buyer completes the markdown calculations to determine if the amount of the projected dollars sold will meet the targeted sales. In this case, the projected sales dollars did not meet the target of $140,000. The Buyer would likely make modest price adjustments of the items with low markup or reevaluate the number of markdowns until the numbers meet the targeted goals. Bear in mind that markdown calculations are used by Buyers in most businesses, although Buyers in some industries may not make use of markdowns regarding perishable ingredients or products. Instead, calculations regarding projected waste (estimates of the amount of ingredients/raw materials that are discarded due to spoilage, contamination, theft, etc.) may be included in the planning process, in place of markdowns. It’s time to examine item Gross Margin. An item’s Gross Margin, or profitability, is roughly stated as the difference between the sales price and cost. While the cost for seasonal items is typically constant throughout the season, there are factors that may affect pricing during the season. Vendors may re-price products during the season. Products may be temporarily discounted to create a sales incentive. Buyers may pool resources to achieve quantity discounts. Buyers may also be able to negotiate a discount with vendors for later or delayed shipments, and off-price buys may be available. Returning to the assortment plan for our earlier example, let’s examine the calculations for Gross Margin dollars. The Buyer takes into account the total cost and total markdowns to get to the total deductions for Gross Margin. Then that total is subtracted from the total retail dollars sold to get to the Gross Margin dollars per item. The previous explanations and examples illustrate how a buyer analyzes and uses projections to run a successful business. These concepts and formulas are tools a business professional uses to plan and then analyze and respond to the results.
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