What is Retail Math? - Definition & Examples

Instructor: Ian Lord

Ian is a real estate investor, MBA, former health professions educator, and Air Force veteran.

Applying basic math skills is critical in evaluating retail performance. In this lesson, we will look at a few examples of retail math formulas and show how they are applied in real world situations.

Retail Math

Bob is the owner and manager of a small toy shop. Although he was never a big fan of math in school, he has since come to realize that basic math skills are essential for his retail business to succeed. At every level of the company, some amount of retail math is necessary in order to conduct transactions, price items, track inventory, and gauge any profit or loss.

Cashier Level Retail Math

Bob's cashiers have to be able to conduct basic arithmetic operations. Although the business has modern point of sale systems that tally up customer purchases and add the sales tax, Bob insists that his staff be able to ring up purchases even if the computers go down. He makes sure that his cashiers can add up purchase prices as well as apply discounts and sales tax with the aid of a handheld calculator. The cashiers also regularly count back change to customers.

Basic Retail Formula

As a manager, Bob is responsible for purchasing inventory at wholesale, then selling that inventory at retail. The spread between these two amounts is determined using the basic retail formula.

The three components of the basic retail formula are the cost of goods sold, the markup, and the retail price. With any two of these variables, Bob can solve for the third. The cost of goods sold (COGS) is the wholesale price that it costs Bob to obtain each product. The markup is an additional amount chosen by Bob that not only covers the operating costs of the store, but also the making of a profit. The retail price is the price that the item is sold for to the customer.

Cost of goods + Markup = Retail Price

Retail Price - Markup = Cost of Goods

Retail Price - Cost of Goods = Markup

Inventory and Sales Formulas

Retail math is also useful when looking at big picture concepts about how Bob's store is doing. What if he wants to know how efficiently inventory is moving through the store or figure out if he is making good use of retail space? Inventory turnover and sales per square foot are two examples of retail math tools Bob can use to evaluate business performance.

Inventory Turnover

The inventory turnover ratio tells him how fast inventory is moving through the store. This lets Bob know how long, on average, any given item stays in the store. A fast turnover is an indicator of increased sales success and efficient operations. To find this out Bob uses the formula:

Cost of Goods Sold (COGS)/ Average Inventory Value = Inventory Turnover

So, if Bob's COGS for the prior month was $45,000, and the average value of his inventory for that same month was $5,000

45,000 / 5,000 = 9

Then Bob's inventory turnover ratio is 9. Although this number alone may not tell Bob much, as he continues to compute this ratio on a monthly basis, he will then be able to compare and get a better understanding of what ratio is good for his business.

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