Control of Merchandise Movement.—The beginning of merchandise control is the fixing of the sales quota, that is, the making of an estimate of sales for the next period. Without a definite goal to be aimed at control is impossible. Buying and finance are dependent on it. A knowledge of the stock on hand at any time is needed to determine the buying requirements. Even in a small business the inventory can at least be estimated on the basis of past performance as to percentage of gross profit and therefore the percentage of cost of goods sold. The application of this figure of percentage of cost of goods sold to the sales for the period gives the cost of goods sold, which, subtracted from the opening inventory plus goods purchased, gives an estimate of the goods in stock. A perpetual inventory kept by quantities rather than by values serves the purpose in many establishments. What is known as the “retail system,” by means of which the value of the stock on hand can be estimated at any time, is used in many large retail establishments. In addition to, and in conjunction with such a system, the use of commodity control cards, as illustrated in [Form 43], gives a sure index of the condition of stock and the movement of merchandise at any time.
The Retail Method of Inventory.—The retail system of inventory is based on the carrying of all goods purchased at a retail sale price as well as at cost price. In the financial records purchases are, of course, always booked at cost. A stock record is kept, however, which carries purchases at retail sale price as well as at cost price. The principle of the perpetual inventory under this method is shown by the fundamental formula:
Opening Inventory + Purchases- Cost of Goods Sold
= Final Inventory
It is apparent that if all the values on the left side of the equation are retail sale values, the right side of the equation represents the final inventory valued at the retail sale price. Thus, if the opening inventory for use in the stock record is set up at the marked sale price, and purchases are similarly set up, the subtraction of the sales to date from the sum of the opening inventory and purchases gives the amount of stock on hand valued at the sale price.
In order to reduce an inventory, valued at retail sale price, to a cost basis, the per cent of mark-on of the cost price to give the original sale price must be applied. This per cent is based on the sale price and not the cost price, being determined by dividing the difference between sale and cost price (that is, the gross profit figure) by the sale price. Thus, a commodity, costing $60 and marked to sell at $100, will, if sold, yield a gross profit of $40, which, given in terms of the sale price, is a 40% gross profit. This 40% is spoken of as the “mark-on per cent.” The cost is, therefore, the difference between 100% and the per cent of mark-on, in this case 60%. That is, 60% of the sale price gives the cost price.
Accordingly, to reduce the inventory value at selling price to a cost price basis, it must be multiplied by 100% minus the per cent of mark-on.
The use of the retail method is thus seen to require a stock record from which the goods on hand as valued at selling price can be determined almost instantly and from which the per cent of mark-on can also be determined. In principle the method is simple. In practice it must be operated very carefully, else unreliable results will be secured. It seldom happens that merchandise will always move at the marked sale price. Adjustments are necessary. On an upward market, perhaps, a higher price can be secured than the marked price. On a downward market or in order to move certain colors and styles, it is necessary to mark down from the original sale price. The fluctuations arising from mark-ups and mark-downs are treated in Chapter XI of Volume III and will not be discussed here. Some applications of the retail method will be explained, however.
Some Buying Records and Their Use.—The chief purpose of the main records kept in business is the securing of control over the activities of the business. The control over merchandise must always be based on records. The first step in securing the necessary control is a proper departmentization of stock. Analysis of purchases and sales by departments is fundamental. In addition, a knowledge of what others in the same line are doing serves as a criterion by which to judge one’s own results. Trade associations and research bureaus are giving invaluable information by furnishing standards for judging results.
Three major problems from the buyer’s standpoint are always met. They are not independent problems but, as indicated above, are intimately related to selling and financial policies. These problems are: (1) the determination of the average stock to be carried; (2) the determination of the buying quota for a given period; and (3) the determination of the “open-to-buy” amount at a given time. Too often these matters are decided in a haphazard fashion. Only by means of a careful analysis of all the factors and the results obtained in the various departments as compared with average or standard results can a sound basis of stock control be secured.