Course Title

Lori SupinieSenseney 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

“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. 2003

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.

2012

Sales $ 300,000

Cost of Goods Sold (186,000)

Gross Margin 114,000

Departmental Income StatementSouthwinds 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 StatementSouthwinds 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

Allocation of ExpensesSouthwinds Music Guitar Dept.

      Total Activity %

Overhead:   Expense Measure Dept. Total Allocation

Occupancy   $ 30,000 $300,000 Sq. Footage 1,500 15,000 10%

Supplies   2,000 $10,000 % of Employees 2 10 20%

Interest   3,000 $30,000 % of Inventory $70,000 $700,000 10%

Telephone   2,400 $12,000 % of Employees 2 10 20%

Credit Card Fees   3,000 $10,000 % of Sales $300,000 $1,000,000 30%

Contract Labor   1,000 $5,000 Direct $1,000 N/A 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

Analysis2012

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. • Southwinds Music Guitar Dept.

Analysis

2012Sales $ 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)

2012Sales $ 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??

Lori@senseneymusic.com

How To Plan for Profit—One Department At a Time