Friday, September 16, 2011

How Much Would You Pay for This?

I'm working on a project that would be a comprehensive guide for all those funky financial terms with which our accountants bombard us at the end of each fiscal year.

I wrote a simple explanation that I published here (free download). This new guide will be in far more detail.

The question today is...
Would you be interested in a guide like this and how much would you pay?

To give you an idea of what you would find in the guide, here is a sample:

Cost of Goods Sold: Cost of Goods Sold (COGS) is a measurement of what you paid out to buy the products you sold in your store. Most people think COGS is calculated by subtracting Profit Margin from 100, but the formula looks like this:

COGS = Beginning Inventory (at cost) + Net Purchases – Ending Inventory (at cost)

The formula is done this way to take into account any merchandise that has disappeared (been stolen, marked out-of-stock for store use, etc.) or any extra discounts you may have received that were not registered in your POS. If you have major inventory adjustments because of theft or loss, your COGS will go up.

Another factor that sometimes goes into this calculation is Freight-in. Some accounting systems include Freight-in as part of the Net Purchase. Some consider Freight-in as a separate Selling Expense. If you include your Freight-in with your Net Purchases then your COGS will be higher. If you do not, then your COGS will be lower.

Although most POS systems will calculate your profit margin based on the cost you paid per item sold, COGS is a more accurate reflection of what you spent on the merchandise you sold because it accounts for those inventory and cost adjustments. Typically accountants will first calculate COGS and then subtract that from 100 to get your true Gross Profit Margin.

A typical COGS for a (insert industry here) should be around (insert industry standard here) (with Freight-in as a separate expense). The higher your COGS, the less money you are making for the products you sell.

If your COGS is much higher than the average store in your industry these are the five most likely reasons:

1. You are including Freight-in in your Net Purchases.
2. You are not marking up your retail prices as high as the typical store in your industry.
3. You carry a heavier load of product lines that traditionally have much lower profit margins than the typical store in your industry.
4. You lost more inventory to theft or store use than the typical store in your industry.
5. You are offering more discounts off your regular prices than the typical store in your industry.

If your store is making a comfortable profit and has ample cash flow, then you do not need to worry about getting your COGS in alignment with other stores. But if your profit or cash flow is not where you want it, you should evaluate those five reasons to see where you can improve or look at ways to increase your Inventory Turn Ratio.

Now imagine an explanation like that for every line of your Balance sheet, your Profit & Loss plus a few other calculations like GMROI, Inventory Turn Ratio, Current Ratio, and a whole bunch of other terms that you only vaguely understand.


How much would you pay?

-Phil Wrzesinski

PS You can simply leave a comment or send me an email. I would love to hear your responses.

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