Sales and Cost of Sales Forecast
In retail, accurately forecasting sales is essential to a successful operation, whether it’s a new start-up or an established business with many years of history. Naturally, the established business has the advantage of previous sales history to draw upon in forecasting a future period. The start-up must draw on market analysis, perhaps the guidance of a veteran mentor and some “educated” guesses.
For the newbie and the experienced retailer, the smart approach is to break the sales estimates into logical categories or departments of merchandise. Most retail businesses can be segmented by type of product making it easier to visualize sales and gross profit margins.
Here are some examples of product segmenting in various retail businesses:
Accessories (socks, ties, handkerchiefs, jewelry)
Trees and Shrubs
Soils and Fertilizers
Pet Food Store:
Dry Packaged Dog and Cat Food
Canned Cat and Dog Food
Cages and Beds
Toys and Accessories
Having established the categories, we can analyze the market based on our store location, market demographics and industry trends. For example, a men’s wear store located in a suburban or semi-rural market might sell more sport coats, slacks and sport shirts than suits and dress shirts. A pet food store in an urban market with condo-dwelling customers will sell more cat food and smaller packages of dog kibble. The suburban or semi-rural garden centre will sell more sod, grass seed and trees than its urban counterpart. When merchandise segments are analyzed separately, in relation to the target market, it’s easier to come up with credible estimates.
Merchandise segments often have common mark-ups. In a separate article, we discuss mark-up in depth. For this discussion, let’s consider a sporting goods business. Tennis racquets and shoes are marked at 40%. That $99.95 pair of sneakers were invoiced to the retailer by the supplier at $60. The gross margin earned by the retailer on the sale is 40% of the selling price. Tennis dresses, shorts, shirts and socks are marked up to yield a margin of 50% of the selling price. In the jewelry business, watches are marked up at a different rate than diamond jewellery. In the grocery business, fresh strawberries are marked up at a different rate than celery.
If we take a systematic approach in grouping merchandise by function and gross profit margin, we can build a picture of cost of sales, gross profit and the quantity of inventory required to generate expected sales.
In a separate discussion on markup and markdowns, we illustrated how gross profit margins can be quickly eroded if merchandise is discounted. For this reason, it is essential that our record-keeping system keep track of the purchase cost of each inventory item and that every sales transaction has a cost associated with it.
When recording sales, at minimum, we should be able to identify each item by its category. A sales report showing sales by category would allow us to attach the mark-up percentage to each category total and compute cost of sales. A point-of-sale system which attaches a direct cost to each item is the ideal. Here, regardless of the final selling price of an item, the associated cost returns the gross profit on the sale of that individual item, resulting in the most accurate measurement of gross profit.
In planning and managing inventory levels, a merchandise budget is essential. A detailed sales and cost of sales forecast generates the data that builds the merchandise budget.