From The Co-Founders


Tips, Tactics & Strategic Insights and Commentary
from The ROI Co-Founders, Pat Johnson and Dick Outcalt
Outcalt & Johnson: Retail Strategists LLC; Retail Turnaround Experts

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Inventory Counts & "the Bottom Line"

It Always Helps to Know "WHY?"

This is the time of year when most retailers are scheduled to take their annual physical inventory count. 

Along with that comes the interruption of daily lives, very serious attitudes of bookkeepers and accountants, and, of course, extra expenses. Oh yes, those!

Typically, preparing for and taking the item-by-item count involves a lot of emphasis on "Make sure to count everything. We don't want to miss anything!"  This often-loud focus is true whether the counting is done manually, by scanning, or any other means. "We must count it all!" 

Okay, but why? Why is it so darn important to count every last fish hook or candy bar or tube of lipstick?! 

It helps to know why.

At the financial year-end of every business, a 12-month Profit & Loss Statement is prepared to re-cap the year (for tax purposes, etc.) Using a very simplified example, it might look like this:

Easy peasy, right?! But let's look again. Where did that $600,000 Cost of Goods come from?

Answer – From a three-part formula: 

  • Beginning Inventory plus Purchases minus Ending Inventory = Cost of Goods Sold
  • For example, this business had $200K in inventory at the beginning of the year, and purchased $600K of inventory @Cost doing the year. Then, at inventory taking time, they counted $200K of inventory. 
    Thus, using the formula, $200K plus $600K minus $200K = $600K COGS.

Ah, but what if they had missed counting $15K of inventory? 

  • the numbers then would be $200K + $600K (–) $185K = $615K COGS
  • Then, Gross Profit would be $385K
  • leading to a $5,000 LOSS!

Conclusion: Every key person in your retail operation should be reminded of the three-part COGS formula.

Why? Without profits, they won't have a job. Simple. 

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