11_RM_MM_Financials_handout

							MERCHANDISE MANAGEMENT – FINANCIALS Snapshot 1. Major aspects of financial merchandise planning and management 2. Cost and retail methods of accounting 3. Merchandise forecasting and budgeting prices 4. Alternative methods of inventory unit control 5. Integrate dollar and unit merchandising control concepts ============================================================= 1. Major aspects of financial merchandise planning and management Financial merchandise management stipulates which products are bought by the retailer, when they are bought and what quantity is bought. Dollar control plans monitors the inventory investment for a given period, while unit control relates to the amount of merchandise handled during that period. Financial merchandise management encompasses methods of accounting, merchandise forecasting and budgeting, unit control systems and integrated dollar and unit controls. 2. Cost and retail methods of accounting The two accounting techniques for retailers are the cost and retail methods of inventory valuation. Physical and book (perpetual) procedures are possible with each. Physical inventory valuation requires actually counting merchandise at prescribed intervals. Book inventory valuation relies on accurate bookkeeping and smooth flow of data. The cost method obligates a retailer to have careful records for each item bought or code its cost on the package. This must be done to find the exact value of ending inventory at cost. Many firms use the LIFO accounting method to approximate that value, which lets them reduce taxes by having a low ending inventory value. In the retail method, closing inventory value is tied to the average relationship between the cost and retail value of merchandise available for sale. This more accurately reflects market conditions, but is more complex.

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Applying LIFO and FIFO inventory methods. 3. Merchandise forecasting and budgeting prices Merchandise forecasting and budgeting is a form of dollar control with six stages: I. Designating control units II. Sales forecasting III. Inventory-level planning IV. Reduction planning V. Planning purchases VI. Planning profit margins.

Adjustments at any point in the process require all later stages to be modified accordingly. Control units are merchandise categories for which data are gathered. They must be narrow enough to isolate problems and opportunities with specific product lines. Sales forecasting may be the key stage in the merchandising and budgeting process because its accuracy affects many other stages. Through inventory

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level planning, a firm sets merchandise quantities for specified periods; techniques include the basic stock percentage variation, weeks supply and stock to sales methods. Reduction planning estimates expected markdowns, discounts and stock shortages. Planned purchases are linked to planned sales, reduction, ending inventory and beginning inventory. Profit margins are related to a retailer’s planned net sales, operating expenses, profit and reductions. 4. Alternative methods of inventory unit control A unit control system involves physical units of merchandise. It includes designating best-sellers and poor-sellers, the quantity of goods on hand, inventory age, reorder time and so on. A physical inventory unit control system may use visual inspection or a stock counting procedure. A perpetual inventory unit control system keeps a running total of the number of units a firm handles by ongoing recordkeeping entries that adjust for sales, returns, transfers, new items received and so on. A perpetual system can be applied manually, by merchandise stage processed by computers or by point-of-sale devices. Virtually all larger retailers conduct regular “wall to wall” physical inventories, three-quarters use a perpetual inventory system. Perpetual Inventory (eg:) Date Beginningof-Month Inventory 7/1/03 $90,500 8/1/03 68,100 9/1/03 10/1/03 11/1/03 12/1/03 57,700 56,500 71,700 81,300

Net Monthly Purchases $40,000 28,000 27,600 44,000 50,400 15,900

Monthly Sales $ 62,400 38,400 28,800 28,800 40,800 61,200

End-ofMonth Inventory $68,100 57,700 56,500 71,700 81,300 36,000

TOTAL

$205,900

$260,400

(as of 12/31/03)

5. Integrate dollar and unit merchandising control concepts The aspects of financial inventory control that integrate dollar and unit control concepts are stock turnover and gross margin return on investment, when to reorder and how much to reorder. Stock turnover is the number of times during a specified period that the average inventory on hand is sold. Gross margin return on investment

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show the relationship between the gross margin in dollars (total dollar operating profits) and average inventory investment (at cost). A reorder point calculation when to reorder includes the retailer’s usage rate, order lead time and safety stock. The economic order quantity -how much to reorder -aids a retailer in choosing how big an order to place, based on both ordering and inventory costs.

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