Retail Math: Mathematics for Manipulating Profit Variables

In Section 1: Calculating Markup: A Merchandising Tool, the importance of retail pricing was explored in order to understand how the three pricing components (i.e., retail price, wholesale cost, and markup) impact the profitability of a successful retail store operation. In Section 2: Skeletal Profit and Loss Statement: Calculating the P & L Statement, another financial planning and analysis tool for the retailer will be examined and discussed.

 

The Profit and Loss Statement (P & L Statement), as the name indicates, delineates the financial picture of the profit or earnings for the store, or on the other hand, the loss of earnings for the store during a specific period of time (i.e., month, quarter, six months, or year).  Since the word “loss” does not paint a positive picture of business operations, many retailers prefer to call the Profit and Loss Statement the Income Statement. Others call it an Operating Statement. The term Income Statement implies success of the retailer’s accomplishment to meet planned sales goals or to bring in revenue, while the Operating Statement relates the impact of operating expenses to net sales and profit.

 

Regardless the name of the statement, the retailer analyzes the previous year’s statement in order to plan and develop the P & L Statement for the next year. Then, during the year, the retailer can compare the actual financial happenings (i.e., monthly, quarterly, and semiannual P & L Statements) of the store to the planned P & L Statement figures. This comparison assists the retailer in making critical business decisions that impact the day-to-day operations for a successful and profitable business operation.

 

The figures on the P & L Statement are reported in both dollars and percents following the same format as the retail price components. When analyzing percents, the retailer has a tool with which he can make comparisons across departments, divisions, and stores. Essentially, P & L Statements may be created for departments, divisions, individual stores or a group of stores. Then, the retailer can analyze each P & L Statement for each department, division or store in order to determine the most and least profitable departments, divisions, or stores within a group of stores. This provides the retailer with insight on problematic divisions within the store or on locations of stores within a group of stores that are not meeting performance goals.

 

There are five components of the Skeletal P & L Statement: net sales, cost of goods sold, gross margin, operating expenses and (net) operating profit. The skeletal statement illustrates only the major components and relates how the components impact the profit of the organization. The Expanded P & L Statement provides details under each component about the contents of that particular component.

 

The skeletal P & L Statement will be explained in Part 2: (2-1 – 2–8) and the expanded statement will be discussed in Part 3: (3-1 – 3-7) of this section. The following Section 2, Part 1:1-2 Terminology provides background information for understanding the major concepts of the P & L Statement.

 

We recommend printing off the course content reference guide via the button below to assist you in the Retail Math for a Profit: How to Think Like a Buyer courses.

 

Terminology of Retailing Profit Variables

  • Contribution or Controllable Margin: amount of margin remaining after controllable direct expenses are subtracted from gross margin.
  • Controllable (Direct) Expenses: expenses, such as salaries of personnel, advertising, supplies, cleaning and maintenance, receiving and marking, that specifically relate to the operation or activities and functions of a selling department and to the sales volume for that specific department.
  • Cost of Goods Sold: the wholesale cost of merchandise plus the transportation cost, including insurance if applicable, minus cash discounts and returns to vendors

 

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