COST OF GOODS SOLD, 101 What It Is Where It Is & How You Figure It Out Book Expo America 2005 NEW YORK, NEW YORK

COST OF GOODS SOLD, 101

What It Is

Where It Is

&

How You Figure It Out

Book Expo America 2005

NEW YORK, NEW YORK

THE THREE BASIC FINANCIAL DOCUMENTS

BALANCE SHEET

A financial snapshot of a company at a point in time.

SOURCES AND USES OF CASH (Cash Flow Statement)

Shows how the cash was generated and was used, by breaking down the activities into operations, financing, and investment activities.

OPERATING STATEMENT The performance of a company over a designated period of time.

ABACUS

ABACUS is an initiative to create a benchmark for the measurement of independent bookstore operations.

• To create the standard• To measure against different business models • To make available a measuring index for use in presentations to landlords and banks• To help identify the variables for success

ABACUS

The numbers generated by the ABACUS study were used to create…

THE 2% SOLUTION

Concentrates on Four Areas:

• Sales

• Margin

• Compensation

• Occupancy

Today we’re focusing on margin…

BUT TODAY’S SESSION IS REALLY ABOUT

COST OF GOODS SOLD

To make a plan to increase margin, you must first

understand and know your Cost of Goods Sold.

DEFINITION OF COST OF GOODS

The total cost of everything you sold or offered for sale during the period.

GROSS MARGIN

Cost of Goods subtracted from sales equals gross margin.

Sales $400,000 100%- Cost of Goods $240,000 60%= Gross Margin $160,000 40%

GROSS PROFIT SECTION OF AN OPERATING STATEMENT

Sales $400,000 100%

Cost of Sales (COG Available for Sale) $284,000 – Beginning Inventory (cost) $40,000– Purchase Expense $244,000

Less Ending Inventory (cost) $44,000

Cost of Goods Sold $240,000 60%

Gross Profit $160,000 40%

In the Gross Profit section of an Operating Statement, we use a calculated Cost of Goods percentage to come

up with the Gross Profit percentage.


Sales $400,000 100%

Cost of Sales (COG Available for Sale) $284,000 – Beginning Inventory (cost) $40,000– Purchase Expense $244,000


Cost of Goods Sold $240,000 60%


But in reality, we are coming up with a way to calculate the ending inventory at cost. We do

that by using…

RETAIL INVENTORY METHOD

A formula for calculating Cost of Goods that works extremely well for

the retail book business.

RETAIL INVENTORY FORMULA

Beginning Inventory (cost) + Purchases

-------------------------------------------------------- = COG%

Ending Inventory (retail) + Sales (retail)


Beginning Inventory (cost)

-------------------------------------------------------- = COG%

Where does this number come from?

We find this number on the Balance Sheet of the previous year’s final financial statement.


+ Purchases

--------------------------------------------------- = COG%

Purchase expense is the only number in the Retail Inventory Formula that requires a calculation. The other three variables are either actually counted or exist on the year-end Balance Sheet.

Purchase expense equals what you spent on merchandise for sale (+) or (-) the difference in accounts payable from

the beginning of the period to the end.

PURCHASE EXPENSE CALCULATION

Checks written for merchandise for sale during the period, plus the difference between accounts payable at the beginning of the period and accounts payable at the end of the period, equals purchases:

Checks = $50,000

Accounts Payable (opening) = $20,000 Accounts Payable (ending) = $10,000 Difference = -$10,000

Purchases = $40,000

PURCHASE EXPENSE CALCULATION

Here’s another example:

Checks = Accounts Payable (opening) = Accounts Payable (ending) = Difference =

Purchases =

$46,000$15,000$19,000$ 4,000

$50,000


-------------------------------------------------------- = COG%

Ending Inventory (retail)

This must be based on an actual count of the merchandise for sale at the end of the last day of the fiscal year. The count is done at the price at which the goods are being offered for sale at that point in time.

COUNTING INVENTORY

There are two ways to count inventory:

•Annual count – On the last day of your fiscal year, physically count every book in the store.•Incremental counts – each month count a few sections, totaling those counts at the end of the year

These are also known as:

•The right way – actual count•The wrong way – incremental count

COUNTING INVENTORY

Incremental counts of inventory are helpful in tracking inventory throughout the year, but they cannot be used for obtaining an accurate count of the inventory to be used in calculating your cost of goods.

Without doing a physical count of your full inventory at least once a year, inaccuracies will mount, and the discrepancy between your inventory and your payables will grow exponentially.

You must “reset the clock” each and every year.

CLEAN CUT-OFFS

Everything must be counted only once, whether it’s a book, a dollar, or a chargeback. Over- or undercounts go directly to your bottom line. For

this reason, it’s crucial to have “clean cut-offs.”

The “Building Blocks”

Book Dollar Chargeback


------------------------------------------------------ = COG%

+ Sales (retail)

This is a total of all sales of all merchandise during the period.

Basically, this is a “Z” tape for the year.



-------------------------------------------------------- = COG%


Now let’s put some numbers in the formula…



$40,000 $244,000

-------------------------------------------------------- = COG%

$73,000 $400,000




$40,000 $244,000

= $284,000

-------------------------------------------------------- ------------- = COG%

= $473,000

$73,000 $400,000




$284,000

-------------------------------------------------------- = .6004 $473,000


COG% = 60%


Sales $400,000 100%

Cost of Sales (COG Available for Sale) $284,000 ° Beginning Inventory (cost) $40,000° Purchase Expense $244,000

Less Ending Inventory (cost) ?

Cost of Good Sold $240,000 60%


Now we can solve for this…



$40,000 $244,000

-------------------------------------------------------- = .6004 (COG%)

$73,000 $400,000


Physically counted ending inventory atretail

XCalculatedCOG% =

$73,000 x .6004=

$43,829

Ending inventoryat cost


Sales $400,000 100%

Cost of Sales (COG Available for Sale) $284,000 ° Beginning Inventory (cost) $40,000° Purchase Expense $244,000


Cost of Good Sold $240,171 60%


Wasn’t that easy?????


OK…So this is not a perfect world.

There are a couple of small weaknesses to this method:

• Discounts given are netted into sales• Shrinkage (theft) is netted into ending inventory at

retail


And to do this right, there are a couple of unbreakable rules that apply:

1. Clean Cut-Offsa. Miscalculations, dollar for dollar, go to the bottom

line

2. Actual Counts of:a. Inventory b. Payables (including chargebacks)

SO WHY IS THIS ALL SO IMPORTANT?

• There is no way to measure the results of your operations without an accurate calculation of Cost of Goods Sold.

• You can’t make a plan to increase margin without first understanding and knowing your COGS.

• You may think you know if you are profitable using historical numbers…

BUT, YOU DON’T!

THE DREAM SCENARIO

“If we could get all independent booksellers to accurately calculate their Cost of Goods, thereby greatly increasing the number of stores with very accurate financial statements, and then get all of those stores to report all of those accurate numbers to the ABACUS Survey, what wonderful educational tools we could develop.” --Anonymous Domnitz

BUT FOR NOW…

Let’s all commit ourselves to creating an accurate set of financial documents, laying a foundation on which we can build stronger, more profitable bookshops moving forward.

THANK YOU FOR LISTENING

THE BEGINNING

Documents

COST OF GOODS SOLD, 101 What It Is Where It Is & How You Figure It Out Book Expo America 2005 NEW YORK, NEW YORK