Retail Math 101 — The Formulas You

Need to Know
Now for the good stuff, the nitty-gritty, the meat and potatoes (or the
tofu and potatoes for our vegan friends) — the core of what you
need to know and retail math definitions explained. Let’s jump right
into some alphabet soup with ten basic retail math formulas.

Note: Every item you sell to a customer is at a cost to you. For

example, although you may sell a pair of shoes for a retail price of
$50, your cost to buy the shoes from the vendor is $20. Recording
your costs for each item is necessary to calculate your COGS,
gross margin, and so many other important figures.

Cost of Goods Sold (COGS)

Beginning Inventory + Purchases - Ending Inventory =

COGS
COGS is a figure that reflects the costs involved in selling a
product. The most basic component of this calculation is the
difference between the costs of your starting inventory and sales,
minus your ending inventory.

If you want to figure out your COGS on just those shoes over a one-
year period. Take the beginning inventory value — for this example,
we’ll use $5,000. Add any additional stock purchases you made
throughout the year — for this example, we’ll use $2,000. Subtract
that from your ending inventory value — for this example, we’ll use
$3,000 and that will equal your COGS.

$5,000 + $2,000 - $3,000 = $4,000 COGS

Gross Margin (GM) & Gross Margin Percentage 

Total Sales – COGS = GM

GM / Total Sales X 100 = GM%
Now that you know your COGS, we can talk about gross margin.
This is your total sales minus your COGS.

If you want to know your gross margin for the second quarter of this
year. You would take your total sales for that period — $20,000.
Subtract your COGS for the same period — $4,000. Which leaves
you with a gross margin of $16,000.

To convert to a percentage, take the gross margin, $16,000 divided

by your sales, $20,000 and then multiply by 100. So it would looks
something like this: $16,000 / $20,000 = 0.8 x 100 = 80%. Here is a
great tool to easily calculate your gross margin and profits.

$20,000 - $4,000 = $16,000 GM

$16,000 / $20,000 = 80% GM%

Gross Margin Return on Investment (GMROI) Percent

GM / Average Inventory Cost X 100 = GMROI%

To determine what kind of profit you are going to make on an item
or a particular product category, you will need to determine the
GMROI. First, you will need to determine your Gross Margin. For
argument sake, let’s say that number is $16,000 based on the
previous example. Divide this number by the average inventory
costs, let’s say $10,000. Then multiply that number by 100 to find
the percentage.

$16,000 / $10,000 = 1.6 x 100 = 160% GMROI

Markup & Markup Percentage 

Retail Price – COGS = Markup

Markup / Retail Price X 100 = Markup %
After all that multiplying and dividing, here’s an easy one for you.
Markup is simply the difference between the COGS and the retail
price. Let’s revisit the shoe example from the COGS illustration.
Your cost for those shoes is $20. You set the retail price at $50,
making your markup $30. To find the markup as a percent, take
the Markup Value, divide it by the Retail Price, and multiply by 100
to find the percentage. 

$50 – $20 = $30 Markup

$30 / $50 = 0.6 X 100 = 60% Markup

Markdown & Markdown Percentage 

Original Retail Price – New Retail Price = Markdown

Markdown / Original Retail Price X 100 = Markdown %
This is the difference between the original retail price and the new
lower retail price. If you know how to mark up a product, then you
need to know how to mark them down without completely deflating
your margins. Markdowns are permanent price reductions, not
discounts for a limited time, and typically occur because an item
has sat on the shelf for too long. This is why it’s imperative to
have inventory control procedures, so you don’t overstock.

Every item that you have to markdown has a direct negative impact
on your margins. Let’s say that you’ve come to the end of the
season and that same pair of shoes is still sitting on the shelf for
$50. You decide to mark it down to $40 making the difference
between the original price and the markdown price $10. To find the
markdown percentage, take the $10, divide by $50 and multiply by
100. The formula would look like this: $10 / $50 = 0.2 x 100 = 20
percent.

$50 – $40 = $10 Markdown

$10 / $50 = 0.2 X 100 = 20% Markdown 

Stock to Sales Ratio

Beginning Inventory / Ending Inventory = Stock to Sales
Ratio
The stock to sales ratio is a good indicator of being overstocked on
a particular inventory item. It tells you that for every 1 item you sold,
you have X quantity on hand. Let’s say at the beginning of the
month your starting inventory for that pair of shoes is 100. As the
month progresses, you sell 70 pairs, leaving 30 pairs as your
ending inventory. To determine your stock to sales ratio, you take
your beginning inventory and divide by your ending inventory.

100 / 30 = 3.33 Stock to Sales Ratio

Sell Thru Percentage

# of Items Sold / Beginning of the Month (BOM)

Inventory = Sell Thru %
The sell thru percentage is the exact opposite or inverse of your
sales to stock ratio. This is the amount of inventory you sold versus
the amount you have on hand. Using the same numbers as the
stock to sales ratio, you will take the number of items sold during
the month, which is 30. Divide that by your BOM inventory, 100 and
multiply by 100 to get the percentage.

30 / 100 = 0.3 X 100 = 30% Sell Thru

Inventory Turnover Rate

COGS / Average Inventory Value = Inventory Turnover

Rate
This measures the ratio in which inventory is sold over a given
amount of time. To find this number, you will need to take your
COGS and divide it by the average inventory value. Again, sticking
with the same shoe inventory example to make it as easy as
possible, you would take your COGS, $4,000 and divide that by
your average inventory value, let’s say $10,000, to find your
turnover rate. 

$4,000 / $10,000 = 0.4% Turnover Rate 

Inventory Shrinkage

Booked Inventory – Physical Inventory = Inventory

Shrinkage
Calculating inventory shrinkage can be something that is a little
tedious because you have to take a physical inventory count.
However, it’s necessary to perform periodically so you how much
inventory is lost to theft, damage, miscounts, or supplier fraud.

Shrinkage is calculated by taking the total value of your inventory

that on the books, or what you’re POS system is calculating and
subtracting it from your physical inventory. For this example, let’s
say your booked inventory is $50,000. You do a physical inventory
count that shows an actual value of $45,000.

$50,000 - $45,000 = $5,000 Inventory Shrinkage

Operating Expense Ratio (OER)

Operating Costs / Sales = OER

Knowing your operating expenses is key to understanding your
business performance. To make sure your operating costs aren’t
exceeding profits and to help you compare to industry benchmarks.
Let’s say your yearly operating costs are $50,000 and your yearly
sales are $125,000. Take your operating costs and divide it by your
sales over the same period and multiply by 100 to find the
percentage.

$50,000 / $125,000 = 0.4 X 100 = 40% OER

The Balance Small Business

Acid-Test Ratio
This is a measurement of how well a business could meet its short-term financial
obligations if sales suddenly stopped. The purpose of this calculation is to determine
how easily a company could be liquidated and helps financial institutions determine
creditworthiness. The easier it is to liquidate, the less risk to the bank or financial
institution. Retail stores may have very low acid-test ratios without necessarily being
in danger.1 For instance, for the fiscal year ending January 2017, Walmart Inc.'s
acid-test ratio was 0.22, while Target Corp.'s was 0.29, equating to ratios of 0.86 and
0.94, respectively.

Acid-Test Ratio = Current Assets - Inventory ÷ Current Liabilities

Average Inventory
This can be figured by taking an item price and subtracting discounts, plus freight
and taxes. The average is found by adding the beginning cost inventory for each
month plus the ending cost inventory for the last month in the period. 2 If calculating
for a season, divide by 7. If calculating for a year, divide by 13. Here's a cost
example: If a clothing retailer has an average inventory of $100,000 and the cost of
goods sold is $200,000, then you would divide $200,000 by $100,000 to give you a
ratio of 2:1, which can be expressed simply as 2.

Average Inventory (Month) = (Beginning of Month Inventory + End of Month Inventory) ÷ 2

Break-Even Analysis
This is the point in your retail business where sales equal expenses. There is no
profit and no loss.3  For example, for a retail store, rent is likely to be the same
regardless of the number of units sold.

Break-Even ($) = Fixed Costs ÷ Gross Margin Percentage

Contribution Margin
This is the difference between total sales revenue and total variable costs. In retail,
the gross margin percent is recognized as the contribution margin percent. This is
useful information for deciding whether to add or remove products and make pricing
decisions.4

Contribution Margin = Total Sales - Variable Costs

Cost of Goods Sold

This is the price paid for a product, plus any additional costs necessary to get the
merchandise into inventory and ready for sale, including shipping and handling. 5  This
method is pretty straight-forward, and very easy to use and implement in a low-
volume, high-cost-per-item retail format.

Gross Margin
This is simply the difference between what an item cost and the price for which it
sells.6  For example, if Store A and B have the same sales, yet Store A's gross
margin is 50 percent and Store B's gross margin is 55 percent, it's easy to see which
store is faring better.

Gross Margin = Total Sales - Cost of Goods

Gross Margin Return on Investment (GMROI)

GMROI calculations assist buyers in evaluating whether a sufficient gross margin is
being earned by the products purchased, compared to the investment in inventory
required to generate those gross margin dollars. 7 For example, if your store has
a sales volume of $1 million a year on an average inventory of $500,000, that would
be pretty good. But $1 million on an average inventory of $200,000 (though
uncommon) would be even better. 

GMROI = Gross Margin $ ÷ Average Inventory Cost

Initial Markup
Initial markup (IMU) is a calculation to determine the selling price a retailer puts on
an item in their store. Some of the things that affect initial markup are brand,
competition, market saturation, anticipated markdowns, and perceived customer
value, to name a few.8

Inventory Turnover (Stock Turn)

Inventory turnover is how many times during a certain calendar period a retailer sells
its inventory and replaces it.9

Turnover = Net Sales ÷ Average Retail Stock

Margin
This is the amount of gross profit a business earns when an item is sold.1 0  For
example, if you have to pay $15 for each sweater and you then sell it to customers
for $39, your retail margin equals $24.

Margin % = (Retail Price - Cost) ÷ Retail Price

Net Sales
Net sales is the number of sales generated by a business after the deduction of
returns, allowances for damaged or missing goods, and any discounts allowed. 1 1

Net Sales = Gross Sales - Returns and Allowances

Open to Buy
Open to Buy (OTB) is the difference between how much inventory is needed and
how much is available. That includes inventory on hand, in transit, and any
outstanding orders.1 2

OTB (retail) = Planned Sales + Planned Markdowns + Planned End of Month Inventory - Planned
Beginning of Month Inventory

Sales per Square Foot

The sales per square foot data is most commonly used for planning inventory
purchases.1 3 This data can also roughly calculate return on investment and is used
to determine rent at a retail location.

Sales per Square Foot = Total Net Sales ÷ Square Feet of Selling Space

Sell-Through Rate
This figure is a comparison of the amount of inventory a retailer receives from a
manufacturer or supplier to what is actually sold and is typically expressed as a
percentage.1 4

Sell-Through % = Units Sold ÷ Units Received

Stock-to-Sales Ratio
Stock-to-sales ratio is the beginning-of-the-month-stock to the number of sales for
the month. The key takeaway is that this ratio is a monthly metric. 1 5

Stock-to-Sales = Beginning of Month Stock ÷ Sales for the Month