FINANCIAL

MERCHANDISE
MANAGEMENT
PRESENTED BY:
JAI BAKLIYA
PALAK DHAMECHA
POOJA AJMERA
SALONI SHAH

Chapter Objectives
1. To describe the major aspects of financial
merchandise planning and management

2. To explain the cost and retail methods of

accounting

3. To study the merchandise forecasting and

budgeting process

4. To examine alternative methods of

inventory unit control

5. To integrate dollar and unit

merchandising control concepts

Financial Merchandise
Management
Through FMM a retailer specifies which products
purchased, when products are purchased, and
how many products are purchased.

Dollar control involves planning and

monitoring a retailers investment in

merchandise over a stated period.
Unit control relates to the quantities of
goods a retailer handles during a stated
period.

Benefits of
Financial Merchandise Plans
The value and amount of inventory in each
department and/or store unit during a given
period are delineated.

The amount of merchandise a buyer can purchase

during a given period is stipulated.

The inventory investment in relation to planned

and actual revenues is studied.

The retailers space requirements are partly

determined by estimating beginning-of-month
and end-of-month inventory levels.

Benefits of
Financial Merchandise Plans (cont.)
A buyers performance is rated. Measures

may be used to set standards.

Stock shortages are determined and

bookkeeping errors and pilferage are

uncovered.

Slow-moving items are classified, leading

to increased sales efforts or markdowns.

A proper balance between inventory and

out-of-stock conditions is maintained.

Inventory Accounting
Systems
The cost accounting system values
merchandise at cost plus inbound
transportation charges.

The retail accounting system values

merchandise at current retail prices.

Cost Method of
Accounting
The cost to the retailer of each item is

recorded on an accounting sheet and/or is

coded on a price tag or merchandise
container.

Can be used with physical or book

inventories:
Physical inventory actual merchandise
count
Book inventory recordkeeping

Physical Inventory System

Ending inventory recorded at cost is

measured by counting the merchandise

in stock at the close of a selling period.

Gross profit is not computed until ending

inventory is valued.

Gross profit is derived during full

merchandise count.

Book Inventory System

This system avoids the problem if infrequent
financial analysis by keeping a running total of
the value of all inventory on hand at cost at a
given time.

A book inventory lets a retailer uncover stock

shortages by comparing projected inventory
values with actual inventory values through
physical inventory.

LIFO and FIFO are two methods to value

inventory

Disadvantages of Cost-Based
Inventory Systems
They require that a cost be assigned to each
item in stock

Do not adjust inventory values to reflect

style changes, end-of-season markdowns, or
sudden surges of demand

The Retail Method

With this method Closing inventory is
determined by calculating the average
relationship between the cost and retail
values of merchandise available for sale
during a period.

Determining Ending
Inventory Value
1. Calculating the cost complement
2. Calculating deductions from retail value
3. Converting retail inventory value to cost

Advantages of the Retail

Method
Valuation errors are reduced when

conducting a physical inventory since

merchandise value is recorded at retail and
costs do not have to be decoded.

Because the process is simpler, a physical

inventory can be completed more often.

Profit-and-loss statement can be based on

book inventory.

Method gives an estimate of inventory

throughout the year and is accepted in

insurance claims.

Limitations of the Retail

Method
Bookkeeping burden
Ending book inventory is correctly computed only if the
following are accurate:
Value of beginning inventory
Purchases
Shipping charges
Markups
Markdowns
Employee discounts
Transfers
Returns
Sales
Cost complement is an average based on the total cost
of merchandise available for sale and total retail value.

Merchandise Forecasting and

Budgeting: Dollar Control

Designating control units

Selection of control units
Such classifications must be narrow enough t isolate
oppurtunities and problems with specific
merchandise lines.

Consistent control units with other companies

Internal comparisons are meaningful only when
categories are stable.

External comparisons are not meaningful.

Classification merchandising

Sales Forecasting
A retailer estimates its expected future revenues
for a given period by sales forecasting.

Most important step is accurate sales

forecasting.

Larger retailers often forecast total and

department sales.

Small retailers rely more on guesstimates

Handy Hardware Store Sales Forecast

Using Product Control Units

Inventory Level Planning

Inventory level must be sufficient to meet sales
expectations.

Techniques to plan inventory levels are the basic

stock percentage variation, weeks supply and
stock-to-sales methods.

 Basic stock method:

Basic stock (at retail)= Average monthly stock at

retail- Average monthly sales

Beginning of the month planned inventory level (at

retail)= Planned monthly sales+ Basic stock

 Percentage variation method:

Beginning of the month planned inventory level (at

retail) = Planned average monthly stock at retail *
[1+ (Estimated monthly sales/Estimated average
monthly sales)]

 Weeks supply method:

Beginning of the month planned inventory level (at

Retail) = Average estimated weekly sales * Number
of weeks to be stocked

Reduction Planning
Retail Reductions : - the difference between
beginning inventory plus purchases during period
and sales plus ending inventory

Planned Reductions
Markdowns
Employee and other discounts
And stock shortages

Planned reductions = (Beginning inventory +

planned purchases) (Planned sales + ending
inventory)

 Two key factors: Estimating expected total

reductions by budget period & assigning the
estimates monthly.

Planning Reductions Consideration: Past experience

Markdown data
Changes in company policy
Merchandise carry over
Price tends
Stock shortage trends

Planning Purchases
Formula: Planned sales for the month + Planned reductions
for the month + Planned end-of-month stock
Beginning of month stock

Open to buy: Difference between planned purchases and the

purchase commitments already made by buyer for
the given period, often one month.

Planning Profit Margins

Required initial markup percentage = Planned
retail expenses + planned profit + planed
reductions / Planned net sales + planned
reductions

Unit Control Systems

Quantities of merchandise in units
not in dollars.
Physical Inventory systems
Perpetual Inventory Systems

Stock Turnover
Number of times the average inventory on hand
is sold.

High rate-Eating places, gasoline service

stations and grocery stores. They rely on sales
volume.

Low rate- Department stores, Jewelry stores,

Clothing stores. They require larger profit
margins on each item.

 Annual rate of stock turnover-

1. Number of units sold during year/Average

inventory on hand

2. Net yearly sales/ Average inventory on hand

3. Cost of goods sold during the year/Average
inventory on hand

Problems in Retail
Profits are lower as prices are reduced in order
to move the high inventory.

Therefore it affects the return on investment as

Turnover as well as profit per unit both are
important.

True Average is not taken.

Gross Margin Return on

Investment
Relationship between Gross margin in dollars
(operating profits) and average inventory
investment by combining profitability and sales
to stock measures.

Helps the management, see the average amount

that the inventory returns above its cost.

A ratio higher than 1 means the firm is selling

the merchandise for more than what it costs the
firm to acquire it.

 GMROI= Gross margin in dollars/ Average

inventory at cost.

It shows how diverse retailers can prosper.

Supermarket- Gross margin of 20% and Sales-tostock ratio 25%. Therefore 500% of GMROI.

Clothing store- Gross margin of 50% and Sales-tostock ratio 10%. Therefore 500% of GMROI.

Reordering
When stock on hand reaches the reordering
point.

EOQ- Quantity per order that minimizes total

costs of processing orders and holding inventory.

EOQ formula must be modified according to the

Quantity discounts, demand changes and
Variable holding and ordering costs.

THANK YOU