Sunday, March 18, 2012

Retailers - Are Your Purchasing Plans Adequate?

Last week I met with a retail client to review their purchasing plans for the coming 12 months. I organised this meeting as a result of our final tax meeting where the client advised that they were cutting back on their purchases for the coming season. I was concerned that if stock purchases were cut back to much, then there would not be enough stock available to break even, let alone make a profit.
I can understand their strategy - buy excess stock and you have to sell surplus stocks at the end of each season at substantial discounts.

I asked the client to put together a general stock purchasing plan for the next 12 months for analysis at our meeting, incorporating indent purchases as well as open to buy. In the meantime, I developed a model that took into account the percentage of sales at full markup and subsequent sales discounting levels for each major product category.

At our meeting, we identified the projected fixed costs for the coming year which included wages, rent and other expenses. I then entered the proposed purchase plan into my model to determine the expected result for the year. Unfortunately, the proposed purchase plan, based on sales and mark up projections for the year would result in a substantial loss for the year - exactly what I feared. In fact, just to break even, an additional $80000 of purchases would be required!

Now, we had focused on improving gross margins over recent years - and the plan confirmed that significant improvements were expected to be achieved. However, due to reductions in the cost price of purchases and unit selling price (due to deliberate changes in product mix) with minimal changes in fixed costs, an increase in sales volume was necessary to achieve the same gross profit dollars.

The moral of this story is, yes, it makes sense to take a critical look at your purchases in these difficult times - however, you must ensure that you are planning to purchase sufficient stock to make an appropriate profit. If you are adamant about the level of purchases and insufficent profit will be generated, then you'll need to look at your costs. The problem here is that most costs are pretty well fixed. So unless you can find some major savings here, there is not alot to be gained. For tips on how to boost your profit by maximising your gross profit, refer to my last blog post - Maximising for Gross Profit - Your Key to Business Success

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