This year top retailers such as Target, Walmart, and Kmart are opening on Thanksgiving Day to give shoppers even more time to start working on their holiday shopping lists. The holiday season, and Black Friday in particular, is the ideal time for businesses to move inventory and increase revenues. Mismanaged inventory during this time causes frustrating issues, like loss in revenue and upset customers. Below are examples of Black Friday inventory disasters and how your small business can avoid experiencing similar situations during the busiest shopping time of the year.
Black Friday Inventory Disasters
In 2011, Best Buy offered several Black Friday and Cyber Monday deals, but it failed to stock the appropriate amount of inventory required to fill all the orders. To make matters worse, they also failed to properly notify their customers until just a week before Christmas. In another example, Tom Johnson, a principal in PriceWaterhouseCopper’s Retail & Consumer Practice shared that the biggest problem retailers faced in the 2012 holiday shopping season was their
management (or mismanagement) of inventory. He points out that retailers with overly optimistic views regarding customer spending levels and who didn’t read the big trends well enough resulted in bad guesses and poor inventory management. These are just a couple of examples of inventory issues being a problem during the holiday season.
Estimate Black Friday Numbers
One way to better prepare for Black Friday is to estimate your numbers for the upcoming year. To start with, a business needs to examine financial data and sales records from the previous years to determine if there are any trends that can be used to estimate inventory that will be used. In addition to that, there are a couple of different methods that can be used to predict inventory cost: the gross profit method and the retail method.
Using the gross profit method means making a partial income statement that starts on the date of the previous inventory and ends on the day the retailer needs the estimated cost. Typically, the ending day for inventory estimation is Black Friday. To start, calculate the cost of goods available for sale as the sum of the cost of beginning inventory and cost of net purchases. Divide gross profit by sales to determine gross profit ratio. To determine estimated costs of goods sold multiply sales made during the period by gross profit ratio. Lastly, determine the cost of ending inventory as the difference of cost of goods available for sale and estimated cost of goods sold. Below is an example of using the gross profit method for calculating the estimated cost of ending inventory.
| Cost of Beginning Inventory |
|
25,000 |
| Net Purchases of Cost |
|
350,000 |
| Freight Cost on Purchases |
|
25,000 |
| Cost of Goods Available for Sale |
|
550,000 |
| Less: Estimated Cost of Goods Sold |
|
|
| Sales |
900,000 |
|
| Estimated Gross Profit |
50% |
|
| Estimated Cost of Goods Sold |
|
450,000 |
| Estimated Cost of Ending Inventory |
|
100,000 |
Retail stores using sales in cost or retail selling prices can use the retail inventory method to estimate inventory. It is based on the calculation of ending inventory for a given time, for example Black Friday. The retail method uses the beginning inventory information calculated in the same way as the gross method. To start, calculate the retail value of goods available for sale during the period by adding the retail value of beginning inventory and retail value of goods purchased. Next, subtract the total sales during the period from the retail value of goods available for sale. Determine the cost to retail price ratio. Lastly, calculate estimated cost of ending inventory by multiplying the difference determined earlier and the cost to retail ratio. Below is an example of using the retail method for calculating the estimated cost of ending inventory.
|
Cost |
Retail |
| Beginning Inventory |
50,000 |
50,000 |
| Purchases |
100,000 |
200,000 |
| Freight-in |
10,000 |
|
| Packing Cost |
5,000 |
|
| Cost of Goods Available for Sale |
165,000 |
250,000 |
| - Sales |
|
150,000 |
| Ending Inventory |
|
100,000 |
| x Cost to Retail Ratio |
|
.66 |
| Ending Inventory |
66,000 |
|
Inventory Tracking How To Avoid Mistakes
Holiday shopping, and Black Friday specifically, can clear out your inventory and empty your store shelves. An inventory tracking solution helps small businesses gain visibility and control of their inventory and their stock levels. We help you improve inventory turnover by easily creating inventory reorder points and setting up alerts for when inventory is low. Our inventory solutions help reduce end-of-year write-offs, eliminate stock-outs, and stop you from wasting time searching for inventory. Learn more about Wasp's
Inventory Tracking for small businesses and how they can help your small business eliminate issues of running out of items, and ultimately, help keep customers satisfied.
