cost of goods sold, 101 what it is where it is & how you figure it out book expo america 2005...
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COST OF GOODS SOLD, 101
What It Is
Where It Is
&
How You Figure It Out
Book Expo America 2005
NEW YORK, NEW YORK
THE THREE BASIC FINANCIAL DOCUMENTS
BALANCE SHEET
A financial snapshot of a company at a point in time.
SOURCES AND USES OF CASH (Cash Flow Statement)
Shows how the cash was generated and was used, by breaking down the activities into operations, financing, and investment activities.
OPERATING STATEMENT The performance of a company over a designated period of time.
ABACUS
ABACUS is an initiative to create a benchmark for the measurement of independent bookstore operations.
• To create the standard• To measure against different business models • To make available a measuring index for use in presentations to landlords and banks• To help identify the variables for success
THE 2% SOLUTION
Concentrates on Four Areas:
• Sales
• Margin
• Compensation
• Occupancy
Today we’re focusing on margin…
BUT TODAY’S SESSION IS REALLY ABOUT
COST OF GOODS SOLD
To make a plan to increase margin, you must first
understand and know your Cost of Goods Sold.
DEFINITION OF COST OF GOODS
The total cost of everything you sold or offered for sale during the period.
GROSS MARGIN
Cost of Goods subtracted from sales equals gross margin.
Sales $400,000 100%- Cost of Goods $240,000 60%= Gross Margin $160,000 40%
GROSS PROFIT SECTION OF AN OPERATING STATEMENT
Sales $400,000 100%
Cost of Sales (COG Available for Sale) $284,000 – Beginning Inventory (cost) $40,000– Purchase Expense $244,000
Less Ending Inventory (cost) $44,000
Cost of Goods Sold $240,000 60%
Gross Profit $160,000 40%
In the Gross Profit section of an Operating Statement, we use a calculated Cost of Goods percentage to come
up with the Gross Profit percentage.
GROSS PROFIT SECTION OF AN OPERATING STATEMENT
Sales $400,000 100%
Cost of Sales (COG Available for Sale) $284,000 – Beginning Inventory (cost) $40,000– Purchase Expense $244,000
Less Ending Inventory (cost) $44,000
Cost of Goods Sold $240,000 60%
Gross Profit $160,000 40%
But in reality, we are coming up with a way to calculate the ending inventory at cost. We do
that by using…
RETAIL INVENTORY METHOD
A formula for calculating Cost of Goods that works extremely well for
the retail book business.
RETAIL INVENTORY FORMULA
Beginning Inventory (cost) + Purchases
-------------------------------------------------------- = COG%
Ending Inventory (retail) + Sales (retail)
RETAIL INVENTORY FORMULA
Beginning Inventory (cost)
-------------------------------------------------------- = COG%
Where does this number come from?
We find this number on the Balance Sheet of the previous year’s final financial statement.
RETAIL INVENTORY FORMULA
+ Purchases
--------------------------------------------------- = COG%
Purchase expense is the only number in the Retail Inventory Formula that requires a calculation. The other three variables are either actually counted or exist on the year-end Balance Sheet.
Purchase expense equals what you spent on merchandise for sale (+) or (-) the difference in accounts payable from
the beginning of the period to the end.
PURCHASE EXPENSE CALCULATION
Checks written for merchandise for sale during the period, plus the difference between accounts payable at the beginning of the period and accounts payable at the end of the period, equals purchases:
Checks = $50,000
Accounts Payable (opening) = $20,000 Accounts Payable (ending) = $10,000 Difference = -$10,000
Purchases = $40,000
PURCHASE EXPENSE CALCULATION
Here’s another example:
Checks = Accounts Payable (opening) = Accounts Payable (ending) = Difference =
Purchases =
$46,000$15,000$19,000$ 4,000
$50,000
RETAIL INVENTORY FORMULA
-------------------------------------------------------- = COG%
Ending Inventory (retail)
This must be based on an actual count of the merchandise for sale at the end of the last day of the fiscal year. The count is done at the price at which the goods are being offered for sale at that point in time.
COUNTING INVENTORY
There are two ways to count inventory:
•Annual count – On the last day of your fiscal year, physically count every book in the store.•Incremental counts – each month count a few sections, totaling those counts at the end of the year
These are also known as:
•The right way – actual count•The wrong way – incremental count
COUNTING INVENTORY
Incremental counts of inventory are helpful in tracking inventory throughout the year, but they cannot be used for obtaining an accurate count of the inventory to be used in calculating your cost of goods.
Without doing a physical count of your full inventory at least once a year, inaccuracies will mount, and the discrepancy between your inventory and your payables will grow exponentially.
You must “reset the clock” each and every year.
CLEAN CUT-OFFS
Everything must be counted only once, whether it’s a book, a dollar, or a chargeback. Over- or undercounts go directly to your bottom line. For
this reason, it’s crucial to have “clean cut-offs.”
The “Building Blocks”
Book Dollar Chargeback
RETAIL INVENTORY FORMULA
------------------------------------------------------ = COG%
+ Sales (retail)
This is a total of all sales of all merchandise during the period.
Basically, this is a “Z” tape for the year.
RETAIL INVENTORY FORMULA
Beginning Inventory (cost) + Purchases
-------------------------------------------------------- = COG%
Ending Inventory (retail) + Sales (retail)
Now let’s put some numbers in the formula…
RETAIL INVENTORY FORMULA
Beginning Inventory (cost) + Purchases
$40,000 $244,000
-------------------------------------------------------- = COG%
$73,000 $400,000
Ending Inventory (retail) + Sales (retail)
RETAIL INVENTORY FORMULA
Beginning Inventory (cost) + Purchases
$40,000 $244,000
= $284,000
-------------------------------------------------------- ------------- = COG%
= $473,000
$73,000 $400,000
Ending Inventory (retail) + Sales (retail)
RETAIL INVENTORY FORMULA
Beginning Inventory (cost) + Purchases
$284,000
-------------------------------------------------------- = .6004 $473,000
Ending Inventory (retail) + Sales (retail)
COG% = 60%
GROSS PROFIT SECTION OF AN OPERATING STATEMENT
Sales $400,000 100%
Cost of Sales (COG Available for Sale) $284,000 ° Beginning Inventory (cost) $40,000° Purchase Expense $244,000
Less Ending Inventory (cost) ?
Cost of Good Sold $240,000 60%
Gross Profit $160,000 40%
Now we can solve for this…
RETAIL INVENTORY FORMULA
Beginning Inventory (cost) + Purchases
$40,000 $244,000
-------------------------------------------------------- = .6004 (COG%)
$73,000 $400,000
Ending Inventory (retail) + Sales (retail)
Physically counted ending inventory atretail
XCalculatedCOG% =
$73,000 x .6004=
$43,829
Ending inventoryat cost
GROSS PROFIT SECTION OF AN OPERATING STATEMENT
Sales $400,000 100%
Cost of Sales (COG Available for Sale) $284,000 ° Beginning Inventory (cost) $40,000° Purchase Expense $244,000
Less Ending Inventory (cost) $43,829
Cost of Good Sold $240,171 60%
Gross Profit $159,829 40%
Wasn’t that easy?????
RETAIL INVENTORY FORMULA
OK…So this is not a perfect world.
There are a couple of small weaknesses to this method:
• Discounts given are netted into sales• Shrinkage (theft) is netted into ending inventory at
retail
RETAIL INVENTORY FORMULA
And to do this right, there are a couple of unbreakable rules that apply:
1. Clean Cut-Offsa. Miscalculations, dollar for dollar, go to the bottom
line
2. Actual Counts of:a. Inventory b. Payables (including chargebacks)
SO WHY IS THIS ALL SO IMPORTANT?
• There is no way to measure the results of your operations without an accurate calculation of Cost of Goods Sold.
• You can’t make a plan to increase margin without first understanding and knowing your COGS.
• You may think you know if you are profitable using historical numbers…
BUT, YOU DON’T!
THE DREAM SCENARIO
“If we could get all independent booksellers to accurately calculate their Cost of Goods, thereby greatly increasing the number of stores with very accurate financial statements, and then get all of those stores to report all of those accurate numbers to the ABACUS Survey, what wonderful educational tools we could develop.” --Anonymous Domnitz
BUT FOR NOW…
Let’s all commit ourselves to creating an accurate set of financial documents, laying a foundation on which we can build stronger, more profitable bookshops moving forward.