3 How to Plan for Profit One Dept at a Time

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Course Title
How To Plan for Profit—One
Department At a Time
Lori Supinie
Senseney Music
Focus: Departmental Profitability
Identifying product categories or
departments that are profitable
– Creating departmental profit/loss statements
– Allocating expenses
– Analyzing results and making adjustments
Purpose: Departmental Profitability
• Maximize Profitability
• Manager Accountability
• Effective use of investments
– Personnel/time
– Inventory $
Twin Sons of Different Mothers
Chip Averwater
Income Statement
Approach
“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
Alan Friedman
Balance Sheet
Approach
“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. 2003
Departmental Income Statement
• Broad (department) or Narrow
(category)
Southwinds Music Guitar Dept.
2012
• Revenues, Cost of Goods
(including freight-in)
• POS System-derived
Sales
$
300,000
Cost of Goods Sold
(186,000)
Gross Margin
114,000
Departmental Income Statement
•Controllable Expenses
• Resources controlled by
manager/owner
• Selling & Non-selling
salaries
•Contribution Margin
Southwinds Music Guitar Dept.
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
• Overhead (NonControllable)
•
Allocation of
expenses based on
some activity measure
• Net Income (Loss)
Southwinds Music Guitar Dept.
Sales
Cost of Goods Sold
Gross Margin
Less Controllable Expenses:
Salaries & Wages
Advertising
Contribution Margin
Less Overhead:
Occupancy
Supplies
Interest
Telephone
Credit Card Fees
Contract Labor
Total Overhead
Net Income (Loss)
$
2012
300,000
(186,000)
114,000
(45,000)
(12,000)
57,000
$
(30,000)
(2,000)
(3,000)
(2,400)
(3,000)
(1,000)
(41,400)
15,600
Allocation of Expenses
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.
Overhead:
Occupancy
$
30,000
Total
Activity
Expense
Measure
$300,000
Sq. Footage
Supplies
2,000
$10,000
% of Employees
Interest
3,000
$30,000
% of Inventory
Telephone
2,400
$12,000
% of Employees
Credit Card Fees
3,000
$10,000
% of Sales
Contract Labor
1,000
$5,000
Total Overhead
$
41,400
Direct
%
Dept.
Total
Allocation
1,500
15,000
10%
2
10
20%
$70,000
2
$300,000
$1,000
$700,000
10
$1,000,000
N/A
10%
20%
30%
N/A
Analysis
• What can I affect?
– Increase revenues
– Increase margins
– Reduce or reallocate
expenses
• Controllable Expenses
• Occupancy
• When is a loss ok?
– Maximize Contribution Margin
Sales
Cost of Goods Sold
Gross Margin
Less Controllable Expenses:
Salaries & Wages
Advertising
Contribution Margin
Less Overhead:
Occupancy
Supplies
Interest
Telephone
Credit Card Fees
Contract Labor
Total Overhead
Net Income (Loss)
$
2012
300,000
(186,000)
114,000
(45,000)
(12,000)
57,000
$
(30,000)
(2,000)
(3,000)
(2,400)
(3,000)
(1,000)
(41,400)
15,600
Analysis
• Southwinds Music Guitar Dept.
Sales
$
Cost of Goods Sold
Gross Margin
Less Controllable Expenses:
Salaries & Wages
Advertising
Contribution Margin
Less Overhead:
Occupancy
Supplies
Interest
Telephone
Credit Card Fees
Contract Labor
Total Overhead
Net Income (Loss)
$
2012
300,000
(186,000)
114,000
(45,000)
(12,000)
57,000
(45,000)
(2,000)
(3,000)
(2,400)
(3,000)
(4,000)
(59,400)
(2,400)
• Southwinds Music Guitar Dept.
Sales
$
Cost of Goods Sold
Gross Margin
Less Controllable Expenses:
Salaries & Wages
Advertising
Contribution Margin
Less Overhead:
Occupancy
Supplies
Interest
Telephone
Credit Card Fees
Contract Labor
Total Overhead
Net Income (Loss)
$
2012
300,000
(195,000)
105,000
(75,000)
(35,000)
(5,000)
(30,000)
(2,000)
(3,000)
(2,400)
(3,000)
(4,000)
(44,400)
(49,400)
In Conclusion . . .
Knowing your Department-level Profitability is
key to:
–
–
–
–
Maximizing overall profitability
Efficient allocation of staff and space
Management accountability
Effective investment in inventory $
How To Plan for Profit—One
Department At a Time
Questions??
[email protected]
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