Merchandise Budget

Merchandise Budget IIIMerchandise ControlEstimating Monthly ReductionsMarkdowns are part of merchandising, particularly in apparel or fashion linesimpossible to match all consumers needs with certainty with respect to sizes and styles.Employee discounts are important in building selling confidence in merchandise.Shortages, such as errors in recording sales, receiving goods, recording markdowns, employee theft, and shoplifting.ReductionsHistorically, department store reductions (markdown, discounts) exceed specialty store reductions (NRMA statistics).Initial markon, or initial markup percentage must cover reductions: (Gross margin $s + Markdowns $s) (Net sales $s + Markdowns $s)Determine the dollar amount, and then allocate to various months, consistent with NRMA statistics.Retail Inventory MethodRetailers must maintain accurate records of inventory investments, such as a perpetual book inventory.Practicality and conservative approach.Pre-established initial mark-up and cost-complement (cost-multipliers), procedures.As markdowns become a larger part of the business, RIM method become more attractive.Inventory Movements Tracked at Retail at Initial MarkupTotal Goods HandledCost RetailBeginning inventory$ 40,000$ 70,000Purchases 144,000 240,000- Returns (6,000) (11,000)Net Purchases 138,000 229,000Transfers in 2,000 3,200- Transfers out (3,000) (4,800)Net Transfers (1,000) (1,600)Freight in 3,000Markups 1,400- Markup cancellations (400)Net Markups 1,000Total Goods Handled$180,000$300,000Initial markon = $300,000 180,000 =$120,000 or 40%In-Season Adjustment to Inventory All Completed at Retail, or at the Sales RegisterTotal Goods HandledCost Retail

Gross Sales$240,000- Consumer Returns (10,000) & AllowancesNet Sales$230,000Markdowns 20,000- Markdown Cancellation (2,000)Net Markdown 18,000Employee Discounts 2,000

Total Reductions to Inventory$250,000Applying the Cost Multiplier,Cost Complement, Cost to Retail RatioCumulative Markon =(total retail - total cost) / total retail: ($300,000 - $180,000) / $300,000 = 40%

The Cost Multiplier =total retail -cumulative markon(100% - cumulative markon%) =60%

Ending book =total goods handled at retail - totalinventory at retailreductions: $300,000 - $250,000 = $50,000

Ending book =ending book inventory at retail x costinventory at costmultiplier: $50,000 x 60% = $30,000Components of Retail InventoryMarkon, initial % markup

Reductions: Markdowns, discounts, and shortages.

Cost complement (cost multiplier)

Public Accounting Firm AuditInitial Markup & Cost ComplementA retailer with a maintained margin (gross margin) of 35%, has planned sales of $230,000 for a season, with total reductions (markdowns) of $20,000. What is the retailers initial markup % ?What is the cost complement, cost multiplier?Sample Test Question 1A department store has planned sales of $500,000, with $300,000 in gross margins for a season, and expects no markdowns.

What is the retailers initial markup % ?Sample Test Problem 2A retailer with a maintained margin (gross margin) of 25% has planned sales of $400,000 for a season, with total reductions (markdowns) of $50,000.

What is the retailers initial markup %?

What is the retailers cost complement?Sample Test Question 3A department store forecasts gross margins $70,000 on planned sales of $180,000 for a season, with total reductions (markdowns) of $20,000.

What is the retailers initial markup % ?Sample Test Question 4A retailer adds $120,000 markon to goods that cost the retailer $180,000. What is the initial markup %?

What is the retailers cost complement?

If markdowns of $60,000 are needed to sell all the goods, what are the net sales and the maintained markup %?

Sample Test Question 5A department store with a maintained margin (gross margin) of 40% has planned sales of $500,000 for a season, with total reductions (markdowns) of $100,000.

What is the retailers initial markup % ?Decentralized InventoryRetail Inventory should be in the storesnot in distribution centersIf inventory were in a single location, tracking inventory movement, or costing out each sale, might not be a problem, such as at an auto dealership.Consider if you had highly trained specialists versus the reality of highly untrained generalists.MarkdownsFrequency of Early markdowns Markdown cancelationsAdditional mark-ons for price increasesVendor mark-down money for close outWithout markdowns, or highly frequent markdowns, the RIM is less important.A source of negotiation between buyer and seller.

Self-Serving Reasons for MarkdownsMarkdowns provide motivations to move obsolete merchandise.Markdowns are usually associated with advertisements, or announced events.Markdown money provides a reason for negotiations between a buyer and seller.Markdown money provides an incentive to new sellers (or suppliers).

Stock-to-Sales RatiosRatio of inventory (at retail) to monthly planned sales.The inverse of a one-month turnover ratio.Historical ratios are maintained to keep store in-stock of merchandiseprovided to buyers, or embedded in software.Basic Stock MethodBasic Stock is an inventory amount added to planned sales and reductions to create a BOM Inventory. The difference of two components:Average stock: (Total sales +reductions)/turnover

Average monthly sales: (Total sales +reductions)/monthsBasic Stock Method

Calculations for a six month merchandise budget

54,600 is added to each months projected sales + reductions to create BOM inventoryCautions: Stock-to-Sales RatiosRetailer specificReported as averagesa retailer does not mind sharing their ratios as it does not have divulge planned sales nor dollar amounts of inventory at retailer.The multiplier effects will exaggerate any anticipated shifts in planned sales without readjustments for the season.Historically tracked by retailer.Stock-to-Sales RatiosRatio of inventory (at retail) to monthly planned sales.The inverse of a one-month turnover ratio.Historical ratios are maintained to keep store in-stock of merchandiseprovided to employees, or embedded in software.Once widely reported measure of inventory levels (National Retail Federation surveys) for benchmarking.Merchandise ControlProcess of collecting and evaluating data on all aspects of each retail merchandise category, including sales, costs, shrinkage, profits, and turnover. Control is achieved through the maintenance of an inventory book where all data are evaluated.The determination and direction of merchandising activities, both in terms of dollars (dollar control) and in terms of units (unit merchandise control). Control begins with a plan, and for the merchandise category this begins with the merchandise budget.Merchandise BudgetProvide the plan for determining store inventorieswhat inventories should be.Purchases and shipments of goods to stores are required to follow this plan.Reductions to inventory, sales, returns, markdowns, and discounts are tracked with regard to the plan.Shortages are deviations from the plan, the shipments in, and all recorded reductions.Cost ComplementUsed to convert EOM Inventory from Merchandise Budget (@retail) to costInitial markup=45%,Cost complement=55%

Turnover: Retail versus CostA retailers 6 month budget has planned sales for season of $200,000, a maintained margin of 30%, an average EOM inventory of 80,000 and an initial markup of 45%. By estimating markdowns, what is the turnover for period?Using cost of goods sold, what is the turnover for the period?Initial markup = (Gross margin + markdowns)(Planned sales + markdowns)

Cost complement = 1 Initial markup

Cost of goods = 1 - Maintained markup (gross margin)

Turnover = Planned/Inventory@retailTurnover = Cost of goods/Inventory@cost

Estimate markdowns and determining turnover

Turnover is identical to cost methodSeasonality: Why We Need a Buying ProcessIf demand were predictableIf demand didnt change with style and fashion trendsIf there was no complications due to reductionsIf there werent differences among suppliers to changing styles or demandIf there was no differences among competitors

Intertype CompetitionSingle-line, limited line, specialty retailersKiosk based specialistsCategory specialist, category killerFamily clothing storesDepartment storeDiscount department storesWarehouse club or supercenter

Local seasonality combined with seasonality of the merchandise line tends to favorAssumptionsChange in the seasonal characteristics of consumer demand for a merchandise line is negligible, or geologicalIntertype competition shifts in demand are revolutionary in comparisonManagement of the merchandise budget may vary slightly from retailer-to-retailer, however, the nature of supply provides standardization.Seasonal CharacteristicsPredictable, recurrent seasonsBack to school, school suppliesChristmas Holiday, outdoor decorationsLawn mowers, lawn fertilizer, bedding plantsLess predictableMens swimwear, shortsSweaters, sweater vestsChildrens dressy clothes

Intertype CompetitionGeneralistsDiscount Department StoresSupercenters & Warehouse ClubConventional Department StoresDollar Stores, Big LotsHome Centers (Lowes, Home Depot)Specialists or Limited Line RetailersMens, Womens, & Family Clothing StoresLimited-line sporting goodsHome electronicsToy, hobbies, and games

We typically, we assign certain product to classifications:Mens underwear versus womens underwear?

Mens dress shirts, collars, sizesexpectancy of standards of fit, neck size.

Mens shoes versus womens shoes

What are the implications of seasonal merchandise and seasonal geography on retailing structure and competition?What conditions would be hardest for a year-round specialty retailer (limited assortment)?

What combinations of seasonality favor a general merchandise, wide assortment retailer?Inventory ControlThe validity of all of the prior discussion is contingent on merchandise that was ordered actually making it into retail display space and remaining there until the sale is recorded at cash register.Opportunities for fraud and theft are abundant on and off the sales floor.How can the buyer be assured that the planned purchases arrive, and are displayed, on the selling floor?Monitoring IssuesMonitoring is important when employees are in charge of operations and separated from ownership.When the owner of the store is also the manager, the buyer, and inventory control managerthere is no need to monitor.When the manager of the store is also the buyer and responsible for inventory control

Avoid the following practices as a buyer:Spending time with vendors outside of the buying offices.Spending too much time receiving goods at the stores.Fraternizing with individuals within your own firms accounting division.

PurchasingReceivingSalesShippingAccounts PayableAccounts ReceivableRetailerSupplierFinancialIntermediaryCarrierPurchase OrderBill of LadingInvoiceThree areas of concernPlanned purchases from merchandise budget become purchase ordersdo purchase orders follow the planor exceed plan?Purchases orders become invoicesdo the quantities and prices match the purchase orders? Is vendor allowed to substitute?Receiving: Do the goods received match the goods invoiced? Are they in saleable condition? Who determines if merchandise is returned?Merchandise Budgets are Plan for ControlDo purchases orders correspond to budget plans?

Can all accounts payable be assigned to specific budget plans and from vendors in the plan?

Do actual goods in stock in stores correspond to planned BOM inventories and sales.