# Retail Formulae

Do you need to have an answer quickly?

Ever wanted to know how to work out a gross margin, GMROI or other retail KPI? Retailtoolbox Retail Formulae lists all the popular retail formula, their definitions and in some cases a simple calculator to plug in your own figures. This is a great way to check if you have the formula right in your own spreadsheet.

• ### Gross Profit:

Gross Profit or Gross Margin is the difference between what you sell a product for, less the cost. This can be expressed in \$’s or as a %

Use this formula for a single product, product groups or total sales in a P&L.
Gross Profit \$’s =
Net Sales - Cost of Goods
We sell 20 widgets at \$5 and each widget costs \$1.
Our gross profit is:
= (20 x \$5) – (20 x \$1)
= \$100 - \$20
= \$80
• ### Gross Margin Percentage (%):

Gross Margin or Gross Profit Percentage (%) is calculated as the gross profit (sales minus cost) as a proportion of the sales and expressed as a %.
Gross Margin % =
(Net Sales – Cost of Goods) ÷ Net Sales

or

Gross Profit ÷ Net Sales
We sell 20 widgets at \$5 and each widget costs \$1.
Gross Margin % is:
= \$80/\$100
= 80%
• ### Mark-Up, Cost of Goods, Retail Price:

Mark-up is the difference between the cost of a good and its selling price. In dollar terms is also the gross profit.

Generally we express mark-up in % terms. This can be a mark-up on cost or a mark-up on sell. In terms of pricing we use the former (on cost)

Product costs \$10, sell is \$20 therefore mark-up is \$10. % mark-up on cost is 20/10 = 200%
Retail Price = Cost of Goods + Mark-Up

Mark-Up = Retail Price - Cost of Goods

Cost of Goods = Retail Price – Mark-Up

Mark-up on Cost (%) = Mark-up Amount ÷ Cost Price

Mark-up on Sell (%) = Mark-up Amount ÷ Retail Price

• ### Discount or Markdown:

The discount or markdown is the difference between the planned selling price (or gross sales) and the actual selling price (or net sales).

Can be expressed as a dollar figure (\$) or as a percentage (%).
Discount or Markdown = Retail Price – Actual Price

or

Discount or % Markdown = (Retail Price – Actual Price) ÷ Retail Price
• ### Break Even Analysis:

The break-even point for a product is where the cost = sales, the point where total revenue received equals the total costs associated with the sale of the product.

A break-even point is typically calculated in order for businesses to determine potential profitability product or promotion.

Break-Even (\$) = Fixed Costs ÷ Gross Margin Percentage
Our retail store buys widgets for \$15 each, marks them up and sells them for \$30. Our monthly expenses (fixed costs) are \$10,000.

\$10,000 ÷ (\$15/\$30) = \$20,000

\$20,000 ÷ \$30 = 667 units

This means we would need to sell 667 units (or \$20,000 in sales) to breakeven.

• ### Net Sales:

Basically net sales are sales after discount or markdowns.

Financially, net sales are reported directly on the P&L and are referred to as Revenue.

Net Sales = Gross Sales – Discounts or Markdowns
• ### GMROI (Gross Margin Return on Investment) :

A measure of inventory productivity. GMROI Measures the gross margin returned for each dollar invested in inventory.

Best used to compare the return on investment between different products or product categories. The higher the number the better.

Can be expressed as a \$ or %.

GMROI (\$’s) = Gross Margin \$’s ÷ Average Inventory @ Cost

or

GMROI (%) = Gross Margin% x Annualised Sales
÷ Average Inventory @ Cost

Open to buy is the dollar amount budgeted by a business for inventory purchases for a specific time period
OTB (retail) = Planned Sales + Planned Markdowns + Planned Closing Stock - Planned Opening Stock
• ### Average Inventory:

Average Inventory for a month is calculated by adding opening stock plus closing stock and divided by 2.

Average inventory for a year is calculated by adding 13 months of closing stocks and dividing by 13

Average Inventory is used in calculating inventory stockturn and Gross Margin Return on Investment (GMROI).

Average Inventory (Month) = (Opening Stock + Closing Stock) ÷ 2
• ### Stock Turn:

Stock Turn measures the number of times inventory is sold over a period, usually a year. The higher the number of "turns" the better.

Stock Turn is also known as inventory turnover, inventory turn, turns or stock turnover.

Stock Turn = Annualised Sales ÷ Average Inventory (at retail)

Annualised Sales = \$200,000

Average Inventory = \$25,000

200,000/25000 = 8 turns
• ### Contribution Margin:

In financial cost-volume-profit analysis, contribution margin is the marginal profit per unit sale.

Contribution margin can be thought of as the fraction of sales that contributes to the offset of fixed costs. Alternatively, unit contribution margin is the amount each unit sale adds to profit: it's the slope of the Profit line.

Contribution Margin = Total Sales - Variable Costs
• ### Cost of Goods Sold (COGS):

In its simplest form COGS is the total cost attributed to the total goods sold.

Financially however, the cost of goods sold (COGS) can include all the direct costs such as the material cost used in creating the goods along with the direct labour costs used to produce the good. It excludes indirect expenses such as distribution costs and sales force costs.

COGS appears on the P&L and can be deducted from revenue to calculate a company's gross margin.

COGS = Beginning Inventory + Purchases - Ending Inventory
• ### Percentage Increase/Decrease:

Used as an analysis tool when comparing performance. Did it increase or decrease and by how much?
Percent Increase/Decrease = Difference Between Two Figures ÷ Previous Figure
• ### Sales Per Square Foot (Sales per unit area):

Sales per unit area is a standard and usually the primary measurement of store success. The unit of area is usually square metres in the metric system or square feet in U.S. customary units. Square feet are also widely used in retailing in the United Kingdom, but there are signs of a trend towards use of square metres.

Sales per Square Foot = Total Net Sales ÷ Square Feet of Selling Space
• ### Sell Through Rate (%):

A measure used to compare the rate of sales of different products or product groups.

Sell-Through (%) = Units Sold ÷ Units Received
• ### Stock to Sales \$’s Ratio:

Ratio used to compare sales to stock.

Stock-to-Sales = Opening Stock ÷ Sales for the Month
• ### Percent (%) Fresh:

A ratio that is used to check stock freshness. This can be adapted to suit any retail sector by changing the measure of freshness. In this case the measure of freshness is less than 4 weeks.
Inventory less than 4 weeks ÷ Total Inventory
• ### Days, Weeks or Months Supply or Cover:

Is a measure of how much stock you have in relation to your sales rate expressed in time. This formula is based on units.

It can also be used for days supply or months supply etc by dividing by the relevant time period.
Units on Hand (inventory) ÷ Average Sales per Week
You have 140 widgets in stock, you’re selling an average of 10 per week. I.e. 140 ÷ 10 = 14. You have 14 weeks cover before you run out of widgets.
• ### Stock to Unit Sales Ratio :

A ratio measuring the relationship between stock and sales. It is used as a quick check of inventory performance over time.

Stock in units divided by unit sales
• ### Current Ratio:

From Balance Sheet:

Tests for solvency or ability to meet current debt obligations. Measures how well you can cover current liabilities with liquid assets. (Higher is better; 2.0 is average.)

Current Ratio =
Current Assets divided by Current Liabilities
• ### Quick Ratio:

In finance, the Acid-test or quick ratio or liquid ratio measures the ability of a company to use its near cash or quick assets to immediately extinguish or retire its current liabilities. Quick assets include those current assets that presumably can be quickly converted to cash at close to their book values.

Generally, the acid test ratio should be 1:1 or better, however this varies widely by industry. In general, the higher the ratio, the greater the company's liquidity (i.e., the better able to meet current obligations using liquid assets).

Quick Ratio = Current Assets - Inventory ÷ Current liabilities
• ### Debt-to-Worth Ratio :

Use Balance Sheet

Compares what the company "owes" creditors to what it "owns." Measures the financial strength of the business. (Lower is better; 1.0 is average.)
Debt-to-Worth Ratio =
Total Liabilities divided by Total Owner's Equity
• ### Inventory Turnover:

Measures how often, at present rate of sales, your entire inventory is completely sold and replaced during a given year. Measures inventory "velocity." (Higher is better; average depends on industry.)

COGS from P&L Inventory from Balance Sheet

Inventory Turnover =
COGS (Cost of Goods Sold) divided by Average Inventory @ Cost
• ### Profit Before Taxes % :

Use P&L

Indicates percentage of sales dollars remaining after all costs (except taxes) are recognized. (Higher is better; average depends on industry.)
Profit Before Taxes % =
Profit Before Taxes divided by Net Sales
• ### Return on Assets (ROA) :

Indicates pre-tax return on assets; measures productivity of assets. (Higher is better; average depends on industry.)

Profit from P&L
Net Assets from Balance Sheet
Return on Assets (ROA) =
Profit Before Taxes divided by Net Assets