You also need to understand the key points of difference between the accounting system used by most large stores and that used by manufacturers and some small retailers, so that confusion will not enter into your discussions with vendors.
The Retail Method
Departmentalized stores quite generally use the retail system of accounting. This differs in approach and terminology from the older cost system used by your resources and some small retailers.
The retail system requires purchases to be recorded at both cost and retail. All retail price changes are also recorded. The percentage relationship between cost and retail over a given period is used to reduce retail values to cost whenever desired. In other words it is a method of approximating the cost valuation of the department's or classification's inventory.
This procedure makes it unnecessary to mark or code each of the thousands of items in a retail stock with their individual cost prices. It does, however, make it extremely necessary for you to maintain strict accuracy in reporting initial retails, price changes, allowances, sales, and transfers of merchandise, returns, and any other transactions that affect the retail value of your inventory.
Since the book value of the inventory is readily available at almost any time, comparison with book and physical inventories can be made as often as management wishes, so that the amount of any shortage can be ascertained.
The cost system requires purchases to be recorded only at cost.
Inventory value can be ascertained only by taking a count of the stock and evaluating each item by means of the coded cost notation on its ticket. Since the books do not report changes in the value of the inventory, as they do under the retail system, shortages cannot readily be measured.
For purposes of calculations that a buyer is called upon to make, cost under the retail system means the invoice price of the merchandise, plus transportation, and without regard to any cash discount.
Under the cost system, the net cost after discount is used.
For purposes of calculating the spread between cost and retail, the retail system calls the difference between the two figures markon, and calculates the markon percentage by dividing dollars of markon by dollars of retail.
The cost system calls the difference between the two figures mark-up and calculates the markup percentage by dividing dollars of mark up by dollars of cost.
The Basic Formula
The markon percentage that guides your buying is the initial mark-on percentage.
Retail for purposes of this calculation is the selling price you put upon the merchandise when it first comes into stock, whether you are working with individual items or totals.
Your management specifies a required initial markon percentage for your department. This is to cover markdowns, shortages, cash discounts, workroom costs, the expense of doing business, and the net profit your department is expected to achieve.
You are not called upon to develop this figure, but to live with it in your purchasing and pricing.
Working with Averages
In the market, some of the costs you encounter will be above or below the allowable cost figures you have worked out. Some of the retails you plan to place upon the merchandise will similarly be above or below the minimum prices you have worked out.
Before you place your orders, average your initial markon figures to see if your purchases will yield a percentage in line with what is expected of you.
Work with dollars of cost (including estimated transportation) and planned initial retail. Find the total markon in dollars, divide by the total retail, and see where you stand.
You cannot average percentages on your various purchases and get a true figure.
Costs can be averaged. If you plan to buy a given number of units at a given allowable cost, you can pay more for some and less for others, and average out, aiming for the same initial markon that you would have had if all costs were identical.
Within your department, the cumulative markon percentages may vary from one classification, price line, or other subdivision to another.
In developing figures for any of these breakdowns for your own guidance, remember that you cannot average the percentages and arrive at a valid result. You must add the dollar figures for all transactions concerned and divide by the total retail involved,
Anticipation is an additional discount that a store deducts from a bill, with the vendor's consent, as compensation for prepaying the obligation.
Such transactions normally involve only the financial officers of your store and the vendor's firm. There may be occasions, however, when the store is more eager to take anticipation than a vendor is to give it. You may be asked to help.
The benefit to the vendor in permitting anticipation is that money is made available to him at rates comparable to or better than those he would have to pay to a bank or factoring company for a loan covering a similar period.
In the highly seasonal fashion business, vendors have usually made their peak commitments for materials and labor by the time they ship goods into retail stores. Early payment by the retailer reduces the strain on the vendor's capital and reduces his need to make bank loans to tide the firm over until cash begins to flow in.