Generic Product Tracking

If you sell standard products to all customers you can track financially by product group and work with a contribution percentage.

For example an entertainment store sells CDs, DVDs and books.

You could create a separate product group for each in your accounting system and collect the sales and purchases for each category.

Because products can be bought and not sold, we have the complication of stock or inventory and we need to adjust purchases.

Cost of goods sold will be opening stock (at the start) plus purchases minus closing stock (at the end).

What you had… plus what you bought… minus what you’ve got left.

It took me some time to get my head around this when I was studying accounting so let’s look at a numbers example.

Generic Product Example

Year 1 Sales 10,000, purchases 8,000, stock at the end of the period 2,000

The Cost of Sales calculation = 8,000 minus the closing stock of 2,000 = 6,000 cost of sales

Contribution = 10,000 sales minus 6,000 cost of sales = £4,000 or a contribution rate or margin of 40% on the sales value.

In year 2, Sales are 20,000, purchases are 15,000 and stock at the end of the year is 3,000.

This time we have the opening stock to bring in to our cost of sales calculation.

2,000 (opening stock) plus 15,000 (purchases) minus 3,000 (closing stock)

Which makes the cost of sales = 14,000

The contribution will be 20,000 sales minus 14,000 cost of sales

Equals £6,000.

Contribution has increased from Year 1 but the contribution margin % has reduced from 40% to 30%.

Perhaps this was because cost increases from suppliers were not passed on to customers…or more customers were attracted by special deals.

Many businesses don’t have the luxury of working with a unit of sales and don’t have any choice but to use percentages.

Just think of the number of stockholding units in a superstore like Tesco or Wal-Mart’s.

The percentage profit made may be much more consistent than the average values per item sold or per customer served.

Return to P1M4 Four Ways To Increase Profit

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