increasing margin (or a tale of two bookstores)

Increasing Margin(or A Tale of Two Bookstores)

BEA 2005BEA 2005

NEW YORK, NEW YORKNEW YORK, NEW YORK

June, 2005June, 2005

ABACUS

ABACUS is an initiative to create a benchmark for the measurement of independent bookstore operations.

The numbers generated by the ABACUS study were used to

create…

Prologue

THE 2% SOLUTION

• Discussed an achievable means of moving from negative profitability (loss) to positive profitability (a gain)

• Isolated the prime movers affecting profitability

• Suggested that progress comes one small step at a time

Prologue

THE 2% SOLUTION

• Sales

• Margin

• Compensation

• Occupancy

Today we’re focusing on Margin

Identifies four prime factors on which to concentrate:

Prologue

The 2% Solution - Combining All Three Strategies

% $ Net Sales 100% 1,500,000Cost of Goods Sold 60.23% 903,418

Gross Profit Percentage 39.79% 596,881Total Compensation 21.29% 319,337

Wages & Salaries 87.34% 278,917

Payroll Taxes 7.54% 24,062

Employee Benefits 4.71% 15,028

Payroll Service 0.31% 980

Total Other Payroll Expense 0.11% 350

Total Occupancy Expense 8.64% 129,535

Rent 80.14% 103,807

Repair & Maintenance 7.34% 9,511Utilities 11.67% 15,115

Total Other Occupancy Expense 0.11% 145

Advertising/Marketing 2.08% 31,137

Telecommunications 0.76% 11,469

Professional Services 0.54% 8,169

Office Expenses 1.44% 21,577

Depreciation 0.97% 14,584

Travel & Entertainment 0.40% 6,034

Insurance 0.62% 9,355

Interest Expense 0.65% 9,812

Credit Card Services 1.30% 19,515

Dues & Subscriptions 0.41% 6,136

Freight Out 0.70% 10,462

Miscellaneous Taxes 0.44% 6,666

Web Expenses 0.25% 3,800

Other Operating Expenses 0.93% 14,014

Total Operating Expenses 41.44% 621,608

Net Income Before Tax -1.67% (25,112)

"Average" store

% $ 100% 1,545,000

59.23% 915,071

40.79% 630,23819.44% 300,364

87.32% 262,277

7.53% 22,627

4.70% 14,132

0.31% 980

0.11% 349

8.22% 126,944

80.14% 101,731

7.34% 9,32011.67% 14,8130.11% 143

1.98% 30,514

0.73% 11,240

0.52% 8,005

1.37% 21,146

0.94% 14,584

0.38% 5,914

0.59% 9,168

0.62% 9,616

1.24% 19,124

0.39% 6,013

0.66% 10,253

0.43% 6,666

0.24% 3,724

0.89% 13,734

38.64% 597,0072.15% 33,231

"Model" store

Sales increased 3% = $18,356

Strategy #1

Contribution to profit


Gross margin increased 1% = $15,450

Strategy #1

Strategy #2



Gross margin increased 1% = $15,450

$16,640

Other expenses cut by 2% = $5,628

Strategy #1

Strategy #2

Strategy #3

Payroll cut by one full time person at $8 per hour =

Taxes and employee benefits reduced proportionately = $2,332


Strategy #3

Prologue

Gross Margin and Cost of Goods

What is Gross Margin?• Gross margin (or gross profit %) = sales minus cost of

goods sold

What is Cost of Goods?• Components of cost of goods sold:

- Purchases- Freight in- Early payment discounts taken- Inventory Shrinkage

Prologue

A Tale of Two Bookstores

$

Sales 1,500,000 100.00% 1,500,000 100.00%

Cost of goods sold: Difference

Purchases 855,000 57.00% 832,050 55.47% 1.53%

Freight in 25,650 1.71% 21,375 1.43% 0.29%

Inventory shrinkage 15,000 1.00% 11,250 0.75% 0.25%

Cash discounts 0 0.00% -5,355 -0.36% 0.36%

Total COGS 895,650 59.71% 859,320 57.29%

Gross margin/gross profit 604,350 40.29% 640,680 42.71%

$36,330 2.42%

Bookstore A Bookstore B

Difference =

$ %

of sales %

of sales

Store B has a gross margin more than 2% higher than store AAchieved through:

•Lower cost of purchases•Lower freight cost•Reducing inventory shrinkage•Taking early payment (cash) discounts

Prologue

Strategies for increasing gross margin

1. Reduce cost of purchases: Bring in higher margin merchandise Increase purchasing discounts

2. Reduce freight costs

3. Take cash discounts

4. Reduce inventory shrinkage

Replacing 10% of book sales with sales of other, higher margin merchandise significantly increases margin

Sales

Books 43% 1,500,000100% 43%

OtherMdse. 0% 0

Total

Increase in gross margin = $10,500, or 0.70%

Bookstore A100% of sales are books with

an average margin of 43%.

Bookstore B90% of sales are in books with an

average margin of 43%. 10% of sales are in other

merchandise with an average margin of 50%

PurchaseDiscount Cost Retail

Avg.Margin

855,000

% of Sales

0

43% 1,350,00090% 43%

10% 75,000

PurchaseDiscount Cost Retail

Avg. Margin

769,500

% of Sales

150,00050%

855,000 1,500,000

50%

43% 844,500 1,500,000 43.7%

Reduce cost of purchases…Bring in higher margin merchandise

(1 of 6)

Examples of higher margin merchandise:•Remainders

•Sidelines and gift items

•Calendars

•Used books

Differences between trade book inventory and higher margin inventory:

•Higher discounts, non-returnable

•Usually net priced—you set the retail price

•Need to plan for sell-through and markdowns in pricing

•Freight can be a killer

•Need to carefully budget buying and allocate space

•Requires more display planning and maintenance than books


Things to Remember

(2 of 6)

To maintain a 50% margin on non-book merchandise, you need to price it correctly

100% mark-up(Double the cost)

110% mark-up(Double the cost +10%)

125% mark-up(Double the cost +25%)

1. Merchandise purchases at cost $75,000 $75,000 $75,000

2. Mark-up 100% 110% 125%

3. Retail value of inventory $150,000 $157,500 $168,750

4. Sell through 90% 90% 90%

5. Full price sales $135,000 $141,750 $151,875

6. Gross profit $60,000 $66,750 $76,875

7. Margin 44.44% 47.01% 50.62%

Of course, you have to price merchandise at what the market will bear,and this scenario doesn’t account for the remaining inventory…


(3 of 6)

By marking down remaining inventory (to move it out the door), you can increase margin even more

110% mark-up, no mark-downs

110% mark-up, mark-downs at cost

110% mark-up, mark-downs above cost

1. Merchandise purchases at cost $75,000 $75,000 $75,000

2. Mark-up 110% 110% 110%

3. Retail value of inventory $157,500 $157,500 $157,500

4. Sell through 90% 90% 90%

5. Full price sales $141,750 $141,750 $141,750

6. Gross profit on full price sales $66,750 $66,750 $66,750

7. Margin (so far) 47.01% 47.01% 47.01%

8. Remaining inventory at cost $7,500 $7,500 $7,500

9. Markdown sales $0 $7,500 $10,000

10. Total sales $141,750 $149,250 $151,750

11. Final gross profit $66,750 $74,250 $76,750

12. Final margin 47.01% 49.75% 50.58%


(4 of 6)

To maintain your margin, build freight into the selling price

Freight costs NOT included in mark up

Freight costs included in mark-up

1. Merchandise purchases at cost $75,000 $75,000

2. Freight @ 5% of merchandise cost $3,750 $3,750

3. Total cost including freight $78,750 $78,750

4. Mark-up 100% 100%

5. "Retail value" of inventory $150,000 $157,500

6. Sell through 100% 100%

7. Sales $150,000 $157,500

8. Gross profit $71,250 $78,750

9. Margin 47.50% 50.00%

Reduce cost of purchasesReduce cost of purchases…Bring in higher margin merchandise

(5 of 6)

Increasing Gross Margin and Gross Profit

How much have we saved so far?

(6 of 6)


$Margin

increase$

Margin increase

Sales 1,500,000 1,500,000Purchases 855,000 855,000

Freight (5%) 25,650 25,650Inventory shrinkage 15,000 15,000

Bring in higher margin merchandise 0 0.00% -10,500 0.70%Total 895,650 40.29% 885,150 40.99%

Total Savings = $10,500 0.70%







Reduce cost of purchases

Strategies

1. Buy more direct from publishers (when appropriate)

2. Plan ordering to maximize discounts

3. Take advantage of stock offers

4. Order electronically to receive (or not lose) EDI discounts

Reduce cost of purchases…Increase purchasing discounts

(1 of 20)

Buy More Directly from PublishersConverting 10% of your wholesaler purchases to publisher

purchases can significantly increase gross margin


Sales 1,500,000 100.00% 1,500,000 100.00%

Purchases:% of total purchases

Average discount

% of total purchases

Average discount

Purchases from wholesalers 50% 41.00% 442,500 40% 41.00% 354,000Purchases from publishers 50% 45.00% 412,500 60% 45.00% 495,000

Total purchases 100% 43.00% 855,000 57.00% 100% 43.40% 849,000 56.60%

$6,000 0.40%Increase in gross margin =

Bookstore BBookstore A

%of sales$

%of sales$

(2 of 20)

Buy More Directly from Publishers

• Order from the wholesaler only what you need right away• Pay attention to wholesaler discount breaks • Plan ahead when ordering from publishers to reduce your

reliance on wholesalers• Decrease publisher lead times by using electronic

ordering

Reduce cost of purchasesReduce cost of purchases…Increase purchasing discounts

Cut wholesaler purchases by splitting ordering between wholesalers and publishers

(3 of 20)

Some Pros and Cons of Buying Direct

Pros• Higher discount• Generally more

favorable payment terms

• Generally more generous co-op terms

• Easier to access co-op

Cons• Less frequent shipments• More shipments and

more paperwork (which means more payroll)

• Much higher error/damage rate

• More time spent following up on problems (even more payroll)


(4 of 20)

Plan Ordering to Maximize DiscountsAdding 0.25% to average discount results in a

significant difference in gross margin


(5 of 20)

$ $

Sales 1,500,000 1,500,000

Purchases:% of total

purchasesAverage discount


Average discount

Purchases from wholesalers 40% 40.25% 358,500 40% 40.50% 357,000Purchases from publishers 60% 45.00% 495,000 60% 45.25% 492,750

Total purchases 100% 853,500 100% 849,750

$3,750 0.25%

Bookstore ADoes not plan orders to maximize

discount

Bookstore BHas a comprehensive buying plan to

maximize discount

Increase in gross margin =

Plan Ordering to Maximize Discounts

In a flat discount environment, just-in-time inventory principles should be applied

But, for orders from smaller publishers that have “tiered” discount schedules, it can pay to plan ordering to maximize discount


(6 of 20)

Plan Ordering to Maximize Discounts

• Maximize discounts from wholesalers by rounding order quantities up and down

• Maximize discounts from publishers by:1. Decreasing ordering frequency

2. Using slower-turning or seasonal titles to boost discount on periodic or seasonal orders


(7 of 20)

Rounding Orders

Wholesaler discount schedule Principles to Apply:Number of copies: 1. Round quantities up or down to the nearest discount break point1 = 40% 2. Reduce twos to ones where possible5 = 41%

10 = 42% Bookstore A Bookstore B100 = 43% Order not maximized for discount Order maximized for discount

RETAIL PRICE QTY DISCOUNTEXTENDEDRETAIL $

EXTENDEDCOST $ QTY DISCOUNT

EXTENDEDRETAIL $

EXTENDEDCOST $

$14.00 8 41% 112.00 66.08 10 42% 140.00 81.20

$26.00 4 40% 104.00 61.36 5 41% 130.00 76.70

$7.99 18 42% 143.82 83.42 10 42% 79.90 46.34

$27.95 2 40% 55.90 33.54 1 40% 27.95 16.77

$13.95 2 40% 27.90 16.74 1 40% 13.95 8.37

$28.95 4 40% 115.80 69.48 5 41% 144.75 85.40

$15.95 12 42% 191.40 111.01 10 42% 159.50 92.51

$12.95 90 42% 1,165.50 675.99 100 43% 1,295.00 738.15TOTALS 140 $1,916 $1,118 142 $1,991 $1,145

Average discount = 41.68% Average discount = 42.47%

Bookseller of Kabul

London Bridges

Reading Lolita in Tehran

I Am Charlotte Simmons

Short History of Nearly Everything

Kite Runner

Plot Against America

Angels & Demons

TITLE

Maximize discount from wholesalers by rounding order quantities up or down


(8 of 20)

Number of units: 1 = 40%25 = 42%50 = 46%

RETAIL PRICE

PAST WEEK

PAST MONTH

PAST 2 MONTHS

$14.00 0 0 1

$7.99 0 1 2

$27.95 0 1 3

$13.95 0 1 2

$28.95 1 2 3 Units 9 25 53$15.95 0 2 4 Retail value $165 $463 $982$12.95 1 1 4 Discount 40% 42% 46%$24.95 0 2 4 Savings $9 $59$14.95 1 2 3

$17.50 1 2 3

$13.95 1 2 3

$35.00 1 2 5

$7.99 0 1 2

$16.95 1 2 4

$14.00 1 3 6

$14.00 1 1 4

Total units 9 25 53

Order

Publisher discount schedule

TITLE

TWO MONTHS

How to Run a Successful Bookstore

Bookselling: a Rewarding Career

How to Make Millions Selling Books ONE WEEK

ONE MONTHBook Buying for Dummies

Guilt Free Hiring & Firing

Great Bookstores of the World

Bookstore Cleaning Guide

How to Avoid Your Customers

Bookselling in the 22nd Century

Shelving Books: the Basics

How to Alienate Your Customers

Shelving Books: Intermediate Level

Sales

Guide to Useful Seminars

Profiles of Problem Employees

Coping with Problem Customers


Decrease Frequency Maximize discount from publishers by decreasing order frequency


(9 of 20)

Buy Slower-Turning Titles Intelligently

• Identify titles that you only want to stock periodically-Slow-turning titles that don’t sell often enough to always keep in stock

• -Seasonal titles that you only want to stock at certain times

• Create a “holding file” to keep orders for slow-turning or seasonal titles, or flag the titles in your computer to create a list on demand

• When you have enough quantity (combined with your regular order) to reach the desired discount, place a periodic or seasonal order

Maximize discounts from publishers by using slow-turning or seasonal titles to boost discount on periodic or seasonal orders


(10 of 20)

Use slower-turning/seasonal titles to boost discount on periodic/seasonal orders

Minimum turn required to always keep a title in stock = 3

Number of units: 1 = 40%

25 = 47%

RETAIL PRICE PAST

MONTH PAST YEARAlways keep

in stock?Regular Monthly

Order

Periodic / Seasonal

Order

$14.00 1 2 No 0 1

$26.00 1 8 Yes 1 3

$7.99 0 2 No 0 1

$13.95 0 2 No 0 1

$28.95 1 4 Yes 1 1

$12.95 1 5 Yes 1 3

$24.95 0 2 No 0 1

$14.95 1 4 Yes 1 1

$13.95 1 3 Yes 1 1

$35.00 1 2 No 0 1

$7.99 0 2 No 0 1

$16.95 1 6 Yes 1 3

$24.95 0 2 No 0 1

$14.95 0 2 No 0 2

$14.00 2 7 Yes 2 3

$14.00 1 2 No 0 1

Units 8 25Retail value $142.00 $440.00

Discount 40% 47%

Savings $31



Book Buying for Dummies


Keeping Your Staff in Line

Bookselling: a Rewarding Career

Worst Bookstores of the World

Guide to Useful Seminars


How to Avoid Your Customers

Shelving Books: Advanced Level

Bookstore Cleaning Guide

Sales

TITLE








(11 of 20)



Number of units: 1 = 40%25 = 47%

Monthly orders

Number of orders placed each year 12

Average order quantity 18

Average order value at retail $300

Total purchases for the year:Retail $3,600

Cost $2,160

Average discount 40.00%

Ordering not planned for discount


(12 of 20)



Number of units: 1 = 40%25 = 47%

Regular monthly orders

Periodic/seasonal orders Total orders

Number of orders placed each year 8 4 12

Average order quantity 10 30 18

Average order value at retail $180 $540 $300

Total purchases for the year:Retail $1,440 $2,160 $3,600

Cost $864 $1,145 $2,009

Average discount 40.00% 47.00% 44.20%

Ordering planned for discount…Placing just four periodic/seasonal orders a year increases average discount


(13 of 20)

Take Advantage of Stock Offers

$ $Sales 1,500,000 1,500,000

Purchases:

% of publisher purchases


Average discount



Average discount

From wholesalers 40% 40.50% 357,000 40% 40.50% 357,000

From publishers 60% 45.00% 495,000 60% 45.20% 493,200Not using stock offers 100% 45.00% 495,000 90% 45.00% 445,500

Using stock offers 0% 0% 0 10% 47.00% 47,700

Total purchases 100% 43.20% 852,000 100% 43.32% 850,200

Increase in gross margin = $1,800 0.12%

Bookstore BTakes advantage of stock offers on 10% of purchases from publishers, at an average

discount gain of 2%

Bookstore ADoes not take advantage of stock

offers

Using stock offers on 10% of publisher purchases makes a difference to gross margin


(14 of 20)


•Buy only what you would normally buy, but place your usual order using the stock offer

•Increase the size of your usual order to get an added benefit from the extra discount

•Accumulate orders for slower-turning or seasonal titles, and place an order when a stock offer becomes available


(15 of 20)

Strategies


Average regular discount = 45%Average stock offer discount = + 2%

Number of stock offers per year = 3

One week supply Two week supply One month supply Two month supply

$500,000 $500,000 $500,000 $500,000

$275,000 $275,000 $275,000 $275,000

-$577 -$1,154 -$2,500 -$5,000

$274,423 $273,846 $272,500 $270,000

45.12% 45.23% 45.50% 46.00%

0.12% 0.23% 0.50% 1.00%

6% 12% 25% 50%

Orders using all three stock offers

Increase over regular discount

Annual savings from stock offers

Cost of purchases after stock offer discounts

Average discount

% of total purchases made using stock offers:

Cost of purchases before stock offer discounts

Hypothetical backlist stock offers

Annual backlist purchases


The effect of stock offers on average discount

(16 of 20)

Evaluate all variables when planning ordering

• If you hold orders, what is the cost in lost sales?• If you take advantage of stock offers, how does

that affect your inventory turns and accounts payable?

• What are the additional payroll costs of adding complexity to your ordering cycle?

• What are the opportunity costs (time spent planning buying that could be spent on something else)?


(17 of 20)

Electronic Ordering Discounts

Sales 1,500,000 1,500,000

Purchases:



Average discount



Average discount

From wholesalers 40% 40.50% 357,000 40% 40.50% 357,000

From publishers 60% 45.00% 495,000 60% 45.10% 494,100

With no EDI discount 100% 45.00% 495,000 90% 45.00% 445,500

With EDI discount 0% 0 10% 46.00% 48,600

Total purchases 100% 43.20% 852,000 100% 43.26% 851,100

Increase in gross margin = $900 0.06%

$ $

Bookstore ADoes not use EDI

Bookstore BEDI discount on 10% of purchases

Receiving EDI discounts on 10% of publisher purchases impacts gross margin


(18 of 20)

Electronic Ordering Discounts

• Extra discount

• The publisher receives your order sooner

• You know the order has been received

• You save on time, fax and paper costs, etc.

• Less chance for human error

Advantages of ordering electronically


(19 of 20)

Increasing Gross Margin and Gross ProfitHow much have we saved so far?


(20 of 20)

$Margin

increase $Margin

increase

Sales 1,500,000 1,500,000Purchases 855,000 855,000


Bring in higher margin merchandise 0 0.00% -10,500 0.70%Buy more direct 0 0.00% -6,000 0.40%

Plan ordering to maximize discounts 0 0.00% -3,750 0.25%Take advantage of stock offers 0 0.00% -1,800 0.12%

Order Electronically 0 0.00% -900 0.06%Total 895,650 40.29% 872,700 41.82%



What is free Freight?

• Freight is never free. Somewhere, someone is paying for shipping. It has long been the contention of the independent bookselling community that freight should be paid by the people who control the means by which products are shipped. In other words, the publishers and wholesalers.

• But it sounds nice… so we’ll use the term “Free freight.”

Reduce freight costs

(1 of 7)

Increase Free Freight Shipments


Moving 10% more purchases to free freight makes a significant difference to gross margin

(2 of 7)

Reduce

freight

$ $Sales 1,500,000 1,500,000


Average discount

Freight cost Total


Average discount

Freight cost Total

Free freight 40% 43.00% 342,000 0.00% 342,000 50% 43.00% 427,500 0.00% 427,500Non- free freight 60% 43.00% 513,000 5.00% 538,650 50% 43.00% 427,500 5.00% 448,875

Total purchases 100% 855,000 880,650 100% 855,000 876,375

Difference in Total Purchases: $4,275

Increase in Gross Margin: 0.29%

Bookstore A40% of purchases are free freight

Bookstore B50% of purchases are free freight

Freight Costs and Margin

Purchasesat retail

Average discount

Purchases at cost

Average freight cost

Total freight costs

Cost of purchases including

freight

Margin after including

freight costs

$750,000 43.00% $427,500 3.00% $12,825 $440,325 41.29%

$750,000 43.00% $427,500 5.00% $21,375 $448,875 40.15%

$750,000 43.00% $427,500 10.00% $42,750 $470,250 37.30%

With average freight costs of 5% of net, you need an average discount of 43% just to maintain a 40% margin


(3 of 7)

Minimum Order for Free Freight is $250

RETAIL PRICE PAST WEEK

PAST MONTH

$14.00 0 1

$26.00 1 1

$7.99 0 1

$27.95 0 1

$13.95 0 1

$28.95 1 1 Units 8 15$15.95 0 1 Retail value $163 $283$12.95 1 1 Discount 46% 46%$24.95 0 1 Cost before freight $88 $153$14.95 1 1 Freight cost % 5% 0%$17.50 1 1 Freight cost $ $4 $0$13.95 1 1 Cost after freight $93 $153$35.00 1 1 Actual discount 43.30% 46.00%$14.00 1 1

$15.00 0 1

8 15$163 $283Retail value

How to Pay Attention in Seminars

Total units



Shelving Books: Intermediate Level




Great Bookstores of the World



How to Make Millions Selling Books ONE WEEK

ONE MONTHBook Buying for Dummies


Keeping Your Staff in Line

Bookselling: a Rewarding Career Order

Sales

TITLE

Meeting Free Freight MinimumsHold orders until they qualify for free freight


(4 of 7)

Freight Costs and Small Shipments

Shipment value at retail

Discount Cost pre-freight

Freight charge

Cost including freight

Margin

$10 35% $6.50 $5.00 $11.50 -15%

$25 35% $16.25 $5.00 $21.25 15%

$10 40% $6.00 $5.00 $11.00 -10%

$25 40% $15.00 $5.00 $20.00 20%

$10 45% $5.50 $5.00 $10.50 -5%

$25 45% $13.75 $5.00 $18.75 25%

$100 45% $55.00 $5.00 $60.00 40%

With freight costs of $5 per shipment, you need $100 worth of books and a 45% discount just to maintain a 40% margin


(5 of 7)

Vendor of Record Programs

Benefits of vendor of record programs• Consolidated shipments• Less paperwork• Faster, more reliable shipping• Usually less damages and errors than with shipments from publishers

Disadvantages of Vendor of Record Programs• You often have to pay the wholesaler sooner than the publisher• Wholesaler discounts are often lower than publisher discounts• Sometimes the wholesaler doesn’t carry the book you want


(6 of 7)

Increasing Gross Margin and Gross ProfitHow much have we saved so far?


(7 of 7)

$Margin

increase$

Margin increase

Sales $1,500,000 $1,500,000Purchases 855,000 855,000


Bring in higher margin merchandise 0 0.00% -10,500 0.70%Buy more direct 0 0.00% -6,000 0.40%

Plan ordering to maximize discount 0 0.00% -3,750 0.25%Take advantage of stock offers 0 0.00% -1,800 0.12%

Order Electronically 0 0.00% -900 0.06%Reduce freight costs 0 0.00% -4,275 0.29%

Total 895,650 40.29% 868,425 42.11%



The Value of Cash Discounts

Take cash discounts

Paying in time to receive cash discounts significantly increases gross margin

$ $Sales 1,500,000 1,500,000


Average discount

Cash Discount Total $


Average discount

Cash Discount Total $

Purchases from wholesalers 40% 40.50% 357,000 0.00% 357,000 40% 40.50% 357,000 1.50% 351,645Purchases from publishers 60% 45.00% 495,000 0.00% 495,000 60% 45.00% 495,000 0.00% 495,000

Total purchases 100% 852,000 852,000 100% 852,000 846,645

Difference in Total Cost $5,355Increase in Gross Margin 0.36%

Bookstore ADoes not take cash discounts

Bookstore BTakes cash discounts

(1 of 5)

Cash Discount and “Effective Discount”

Base discount

Cash discount

Effective discount

40% 1% 40.60%

41% 1% 41.59%

42% 1% 42.58%

40% 2% 41.20%

41% 2% 42.18%

42% 2% 43.16%

Compare effective discount with publisher discount to decide if you are better off ordering through a wholesaler

Take cash discounts

(2 of 5)

The value of cash discounts versus the cost of borrowing

Monthly wholesaler

purchases at cost

Cash Discount

%

Cash discount payment

terms (days EOM)

Normal payment

terms(days EOM)

Borrowing cost %

Cash discount $

Borrowing cost

$

$50,000 2% 10 30 7% $1,000 $192

$50,000 2% 10 30 10% $1,000 $274

$50,000 2% 10 30 12% $1,000 $329

$50,000 1% 10 30 7% $500 $192

$50,000 1% 10 30 10% $500 $274

$50,000 1% 10 30 12% $500 $329

Take cash discounts

(3 of 5)

Publisher vs. Wholesaler Terms

Wholesaler B, with free freight and a 2% cash discount, is a better deal than Publisher B, even though Publisher B’s

base discount is three points higher.

Take cash discounts

(4 of 5)

Publisher A Publisher B Wholesaler A Wholesaler B(free freight) (not free freight) (free freight) (free freight)

45.0% 45.0% 41.5% 41.5%0.0% 5.0% 0.0% 0.0%0% 0% 1% 2%

Purchases at retail = $100,000$55,000 $55,000 $58,500 $58,500

$0 $2,750 $0 $0$0 $0 -$585 -$1,170

$55,000 $57,750 $57,915 $57,330

45.00% 42.25% 42.09% 42.67%

Average discountFreight charges as a percentage of costCash discount

Purchases at cost

Margin

Freight chargesCash discountsTotal cost of purchases

Publisher vs. Wholesaler Terms

Take cash discounts

Factoring in the value of payment terms

(5 of 5)

Publisher A Publisher B Wholesaler A Wholesaler B(free freight) (not free freight) (free freight) (free freight)

Purchases at retail = $100,000

$55,000 $55,000 $58,500 $58,500

$0 $2,750 $0 $0

$0 $0 -$585 -$1,170

$55,000 $57,750 $57,915 $57,33045.00% 42.25% 42.09% 42.67%

Interest rate for calculating value of

payment terms = 7.0%

60 30 10 10

-$633 -$316 -$112 -$112

$54,367 $57,434 $57,803 $57,218

45.63% 42.57% 42.20% 42.78%

Payment terms (days EOM)

Purchases at cost

Freight charges

Cash discounts

Total cost of purchases

Value of payment terms

Margin after accounting for value of payment terms

Margin

Cost of purchases after accounting for payment terms

Reduce inventory shrinkage

$

Sales 1,500,000 100.00% 1,500,000 100.00%

Cost of goods sold:Purchases 855,000 57.00% 855,000 57.00%Freight in 25,650 1.71% 25,650 1.71%

Inventory shrinkage 15,000 1.00% 11,250 0.75%Total COGS 895,650 59.71% 891,900 59.46%

Gross margin/gross profit 604,350 40.29% 608,100 40.54%

$3,750 0.25%Difference =

Bookstore AHas no plan for

controlling inventory shrinkage

Bookstore BHas a comprehensive

plan for controlling inventory shrinkage

$ %

of sales %

of sales


(1 of 2)



• Train staff in security procedures• Change store layout to deter theft • Take steps to reduce employee theft• Prosecute thieves• Use security systems (cameras, security gates)


(2 of 2)

Increasing Gross Margin and Gross Profit(or A Tale of Two Bookstores)

So how much did we save overall?

$Margin

increase $Margin

increase

Sales 1,500,000 1,500,000Purchases 855,000 855,000Freight 25,650 25,650Inventory shrinkage 15,000 15,000Bring in higher margin merchandise 0 0.00% -10,500 0.70%Buy more direct 0 0.00% -6,000 0.40%Plan ordering to maximize discount 0 0.00% -3,750 0.25%Take advantage of stock offers 0 0.00% -1,800 0.12%Order Electronically 0 0.00% -900 0.06%Reduce freight costs 0 0.00% -4,275 0.29%Take cash discounts 0 0.00% -5,355 0.36%Reduce inventory shrinkage 0 0.00% -3,750 0.25%

895,650 40.29% 859,320 42.71%


Total savings = $36,330 2.42%

Other Ways to Increase Gross Margin

• Reduce freight-out by cutting returns• Buy non-returnable• Examine pricing and discounting policies• Reduce sales of low margin merchandise• Follow up on credits not received from

publishers

Increasing Margin(or A Tale of Two Bookstores)

Thanks for Listening!Thanks for Listening!

increasing margin (or a tale of two bookstores)

Documents

payroll expense0

total compensation21

total occupancy expense8

occupancy expense0

payroll taxes7

payroll service0

total operating expenses41

new abacus18the average