Rx for a Healthier Business
Rx for a Healthier Business: Turn More, Earn More
As hospital administrators focus on a continuous-improvement culture throughout their organization, gift shop managers and those with gift shop oversight are held accountable for maximizing sales and profit performance. Implementing standard retail industry processes and procedures is the most effective way for gift shop managers to meet this challenge.
Inventory is an important asset!
The key contributor to maximum gross margin profit is properly-managed inventory. The starting point is to begin each fiscal cycle with a physical inventory. Accurate and timely physical inventories are one of the gift shop manager’s most important responsibilities. If you don’t measure it, you can’t manage it! However, many gift shop managers don’t conduct an annual physical inventory because it’s never been required. Of those that complete a physical inventory, few use the resulting information to improve gift shop operation.
Why take inventory?
- To accurately measure annual cost of goods sold.
- To identify and correct security problems.
- To maintain a perpetual inventory system and improve buying practices.
Physical inventory is the only true measure of the actual cost of goods sold, and subsequently the actual gross margin profit. Because it is unrealistic to conduct physical inventory every month, a standard method many hospital gift shop bookkeepers use for their monthly financial reports is to track monthly purchases, deduct the purchases from gross sales, and report this figure as the monthly gross margin income.
While this standard method is acceptable for monthly reporting, it should not be used for year-end reporting because it reflects the cost of goods purchased, not cost of goods sold.
Accurately measure annual cost of goods sold.
Markdowns and inventory shrinkage from theft must be reported in order to correctly determine annual cost of goods sold. The only way to determine inventory shrinkage is by conducting a year-end physical inventory. If you don’t know how much merchandise you have at year end, it is impossible to determine how much merchandise was sold at the original retail price and how much was lost from internal theft and shoplifting.
Identify and correct security problems.
Retail industry analysts report that in 2004, internal theft and shoplifting amounted to over $230 billion dollars. We all know there is theft in our shops, but many managers can’t put a dollar amount on their losses. A physical inventory alerts managers to problem departments and helps them formulate solutions to improve security measures. You can’t fix the problem until you identify the problem and then take specific corrective action.
Maintain a perpetual inventory system and improve buying practices.
A perpetual inventory system is an accounting method used to record the value of their inventory on an ongoing basis by creating book inventory. A book inventory is similar to your personal checking account. The year-end physical inventory is the beginning balance, merchandise purchases are deposits to the account, and sales and markdowns are withdrawals from the account. A year-end physical inventory is how we reconcile the account.
Ideally, at the end of the year, the physical inventory will match the book inventory. If the physical inventory is less than the book inventory, there is inventory shortage. If the physical inventory exceeds the book inventory, there is inventory overage. Inventory shortage increases the cost of goods sold, which decreases the gross margin profit. While an inventory overage may sound desirable, overages are usually the result of paperwork errors and will ultimately show up as an inventory shortage at the next physical inventory.
Even if you have a computerized point-of-sale system, you still must conduct a physical inventory for year-end financial reporting purposes. The point-of-sale system can create a book inventory, but you will need to do an annual physical inventory to correct paperwork mistakes, and to account for any theft that may have occurred during the year.
If you don’t know how much you own, you won’t know how much to buy. The book inventory is also the basis for creating monthly open to buy plans. These plans allow managers to maintain well balanced departments, and achieve sales and profit goals.
Summary.
It’s not always easy to balance creative impulse with good business practice, and conducting an annual physical inventory is tiring, tedious, and time-consuming. However, it is the first step to proper inventory management, and increased sales and profits.