Markup analysis for 2009
I’ve been looking over our financial data from 2009, and I thought I’d share some findings.
In particular, I’ve been looking at some metrics for how efficiently we turn money into inventory and back into money. If you look at the amount of money we made (our SALES) and divide by the amount of money we spent on inventory and related expenses (COGS, or Cost Of Goods Sold), you get our SALES/COGS ratio, which was 1.21 for 2009. This is also called a “markup” of 21%. That means for every $1.00 we spent on inventory, we sold that inventory for $1.21.
To look at it a different way, for every $1.00 we earn in sales, we get keep $0.17, which is known as a 17% “margin”. Markup and margin are related, but different, and it’s easy to get them confused. For item we sell for $1.00, for instance, a markup of 100% means we paid $0.50 for it. A 100% margin on the same item would mean that we got it for free. Confused yet? Great. I’ll stick with markup, or SALES/COGS, for the rest of this post.
As I said, for 2009 our SALES/COGS was 1.21. Our target has been 1.5, so this is a little lower than we were aiming for. However, it fluctuated month to month — in July, for instance, it was 0.98, meaning we actually spent more on inventory than we sold. This is because we grew our inventory selection massively over the summer, and we didn’t see the jump in sales until later in the autumn, when our SALES/COGS went up to 1.35.
Our monthly expenses — everything that is not an inventory expense — hover around $10,000. This includes payroll, rent, utilities, insurance, repairs, and taxes. To break even, we need to cover this — and hopefully make some extra to cover slow months like December, finance growth, and pay back our loans.
At a SALES/COGS ratio of 1.21, we need to sell about $58,000 per month, or $1,960 per day, to break even. This is much higher than we are doing right now — for instance, in May 2010 we averaged just over $1,500 per day, and June has been lower. If SALES/COGS was 1.3 instead of 1.21, we would only have to average $1,444 per day, and we would be officially in the black.
We’re not sure what our SALES/COGS is for 2010 yet. We are still crunching the numbers on the first 6 months. But it looks like it’s going to be higher than 1.21 — maybe 1.3 or 1.35. Here is a chart showing how much we would have to sell every day for each value of SALES/COGS.
As you can see, if our sales numbers stay flat over the summer then we need to be in the 1.3 range to break even, and 1.4 would mean we’re solidly in the black.
There are lots of ways for us to try to nudge our SALES/COGS up. The most obvious way is to raise prices, but we’d like to avoid doing that as much as possible (and our customers would like us to avoid that, too)! Other methods include finding better sources for our products, seeking out special promotional deals with manufacturers, and reducing “shrinkage” due to spoilage. Especially with produce and fresh bread, there is a very fine line between buying to little and running out, and buying too much and facing spoilage. Tweaking our ordering could help raise our markup to a healthier level without raising prices.