Retail is not rocket science. But sadly more retailers crash and burn than do NASA space ships. But even though retail math is pretty straight forward, it must be done to insure a retailers success. If you don’t do the math, you’re going to be in trouble.
The most important formula you’re going to need is Sales – Cost – Overhead = Profits. Overhead is an important part of the equation as if you don’t pay for overhead, you won’t have a place to sell your goods. Your merchandise cost is important because if you don’t pay for the merchandise you certainly won’t get more.
OK, let’s say you buy 10 items for $20 each and put them on the sales floor for $40 each. If you sell all 10, you’ll take in $400. You then need to pay your supplier which will take $200 leaving $200 for overhead and profit. Overhead is made up of rent, labor, advertising, utilities, etc – everything it takes to keep the lights on and the doors open and you can plan that will generally cost you 40% of your sales or in this example – $160. That leaves you with a $40 profit or 10%. Of course, then come taxes, but let’s forget them for a while.
Hey, a 10% profit for your store would be pretty sweet, but it would require selling 100% of everything that you order (and when did that happen?). OK, so let’s say you only sell 8 of the 10 items at full price and mark down the other two to 50% off. What does the equation look like now? Sales of $320 (8x$40) + $40 (2x$20 markdowns) – cost of $200 (10x$20) – overhead $160 (every item of merchandise must carry it’s proportional share of overhead) = $0.
The sad truth is that you must sell through at least 80% of your merchandise at full price just to break even. That means no profit, but you will be able to pay the bills. But let’s assume you actually want to make a profit. How do you assure that your buying is correct to support your sales so you are able to sell through 80% or more? There is only one answer and that is “open to buy” planning.
Without open to buy, you are guessing at your needs and you will never get it right. You will always over buy and you will constantly be marking merchandise down to enable you to seem to stay ahead of your bills. But you won’t.
You need open to buy, and the sooner you install a system in your store the sooner you will start making money. If you don’t believe me, just do the math!