Course Title

Lori Supinie Senseney Music How To Plan for Profit—One Department At a Time

Identifying product categories or departments that are profitable –Creating departmental profit/loss statements –Allocating expenses –Analyzing results and making adjustments Focus: Departmental Profitability

Maximize Profitability Manager Accountability Effective use of investments –Personnel/time –Inventory $ Purpose: Departmental Profitability

Twin Sons of Different Mothers Chip Averwater Alan Friedman “Turnover is not the goal – profit is. We should invest every dollar we have reasonable access to in the inventory that will offer us the best (net) profit. What that does to our turnover ratio is irrelevant.” Retail Truths, ©2012 “Inventory turns are the name of the game when working toward achieving profitability. By turning your inventory quickly, you can make up gross profit “dollars” lost by declining margins.” Music, Inc., Aug Income Statement Approach Balance Sheet Approach

Departmental Income Statement Broad (department) or Narrow (category) Revenues, Cost of Goods (including freight-in) POS System-derived Southwinds Music Guitar Dept Sales $ 300,000 Cost of Goods Sold (186,000) Gross Margin 114,000

Departmental Income Statement Southwinds Music Guitar Dept. Controllable Expenses Resources controlled by manager/owner Selling & Non-selling salaries Contribution Margin 2012 Sales $ 300,000 Cost of Goods Sold (186,000) Gross Margin 114,000 Less Controllable Expenses: Salaries & Wages (45,000) Advertising (12,000) Contribution Margin 57,000

Departmental Income Statement Southwinds Music Guitar Dept. Overhead (Non- Controllable) Allocation of expenses based on some activity measure Net Income (Loss) 2012 Sales $ 300,000 Cost of Goods Sold (186,000) Gross Margin 114,000 Less Controllable Expenses: Salaries & Wages (45,000) Advertising (12,000) Contribution Margin 57,000 Less Overhead: Occupancy (30,000) Supplies (2,000) Interest (3,000) Telephone (2,400) Credit Card Fees (3,000) Contract Labor (1,000) Total Overhead (41,400) Net Income (Loss) $ 15,600

What’s an Appropriate Activity Measure? Square footage (occupancy) # of employees / usage (supplies, telephone) Time (salaries) Direct attribution (contract labor, travel) % of Inventory (interest) % of Sales (credit card fees) Allocation of Expenses

Southwinds Music Guitar Dept. TotalActivity% Overhead: ExpenseMeasureDept.TotalAllocation Occupancy $ 30,000$300,000Sq. Footage 1,500 15,00010% Supplies 2,000 $10,000% of Employees % Interest 3,000 $30,000% of Inventory $70,000 $700,00010% Telephone 2,400 $12,000% of Employees % Credit Card Fees 3,000 $10,000% of Sales $300,000 $1,000,00030% Contract Labor 1,000 $5,000Direct $1,000 N/A Total Overhead $ 41,400

What can I affect? –Increase revenues –Increase margins –Reduce or reallocate expenses Controllable Expenses Occupancy When is a loss ok? –Maximize Contribution Margin Analysis 2012 Sales $ 300,000 Cost of Goods Sold (186,000) Gross Margin 114,000 Less Controllable Expenses: Salaries & Wages (45,000) Advertising (12,000) Contribution Margin 57,000 Less Overhead: Occupancy (30,000) Supplies (2,000) Interest (3,000) Telephone (2,400) Credit Card Fees (3,000) Contract Labor (1,000) Total Overhead (41,400) Net Income (Loss) $ 15,600

Southwinds Music Guitar Dept. Analysis 2012 Sales $ 300,000 Cost of Goods Sold (186,000) Gross Margin 114,000 Less Controllable Expenses: Salaries & Wages (45,000) Advertising (12,000) Contribution Margin 57,000 Less Overhead: Occupancy (45,000) Supplies (2,000) Interest (3,000) Telephone (2,400) Credit Card Fees (3,000) Contract Labor (4,000) Total Overhead (59,400) Net Income (Loss) $ (2,400) 2012 Sales $ 300,000 Cost of Goods Sold (195,000) Gross Margin 105,000 Less Controllable Expenses: Salaries & Wages (75,000) Advertising (35,000) Contribution Margin (5,000) Less Overhead: Occupancy (30,000) Supplies (2,000) Interest (3,000) Telephone (2,400) Credit Card Fees (3,000) Contract Labor (4,000) Total Overhead (44,400) Net Income (Loss) $ (49,400)

Knowing your Department-level Profitability is key to: –Maximizing overall profitability –Efficient allocation of staff and space –Management accountability –Effective investment in inventory $ In Conclusion...

Questions?? How To Plan for Profit—One Department At a Time