In the current situation in retailing today markdowns are a fact of life. Whether we like it or not the buying of merchandise, although becoming more sophisticated is still subject to buyer error.

 
Changing fashions and colours, or ordering too much, can result in markdowns being required in order to sell the merchandise.  If you accept this as a fact you can now set up a budget to monitor markdowns to determine just how effective your buying has been.

 
Obviously if your Markdowns are greater than you thought, this will have a major impact on your profits.   If lower than you thought, you should see the effect on our bottom line profit.

Setting the budget would be of no value unless, at the same time, you can set up a method of estimating the value of proposed markdowns from your normal prices. This is simpler to do than it looks.

You will find that many easily available computer programs are programmed to do this. If you prefer to operate manually a calculator and an analysis book can do the job just as well.

PREPARING A MARK-DOWN BUDGET

In order to set up your budget for Markdowns for next season, you need the following accounting information
The projected monthly sales for the store or if applicable by department.

1. Your mark -up on products that will allow you to calculate your " 1st Margin   on sales." 
2. This refers to the Gross Profit on sales if all goods were sold at full margin.
3. The final gross profit you expect to show in your accounts after markdown.

The following example demonstrates an accounting budget and a markdown budget:

ACCOUNTING BUDGET

                                                   $                                %                         

Sales Budget -Net                   1000                           100

Cost of Sales                            600                              60

Gross Profit                              400                               40

MARKDOWN BUDGET

Mark up on all Goods              100%

Gross Profit at Full Margin        50%

You will see that the cost of sales will remain unchanged irrespective of you having Markdowns or not.

For example if all goods were sold at Full Mark-Up of 100 % on cost, you would have achieved theoretical sales for the year of:

               600   +  100% of $600       =     $1200

                                                       -----------------------------------------    x  100

                                                                  Theoretical Sales

                                                        =  ( $1200    - $1000)  

                                                             -----------------------   x    100                                                          

                                                                       1200

                                                       =             200

                                                                     --------    x  100

                                                                     1200

                                                      =             16.67%

The above example shows that you are budgeting for markdowns with a sales value of $200 for the year.

If you multiply the selling price of a product with the number of products sold during the year, you will be able to calculate the actual value of your Markdowns.  This is a valuable figure for your budgeting 

Comparing the actual value with the budgeted value of markdowns will measure the efficiency of the buying department and their ability to obtain the margins on products that the company expects to achieve. 

 If you don’t have a Markdown budget then this should be prepared as soon as possible.

Hymie Zawatzky

www.thetemplargroup.com.au