A key to improving your profitability is to set sales margins on the products you sell. Come as close as you reasonably can to setting margins on individual items rather than on product classes. In Making Money Is Not Illegal, Immoral or Fattening, Art Freedman and I describe in detail how to calculate the four types of margin. For our readers, here's a reminder of what you'll find starting on page 63 of the book. For those who have not yet read the book, here's an introduction:
Sitting Margin. If you took a snapshot of your current costs and retails right now, today, it would consider all of your sales on each item for the last twelve months on each of those SKUs. If you sold every item as you did last year, based on your current costs and retails, this is your Sitting Margin. This number will give you indicators of when your margins are slipping.
Back Door Margin. This is what your current retails are when the product comes off the truck minus how much you pay for the product. Some retailers include any value-added taxes, tariffs, transportation costs, and duties in the cost of goods, since they are a part of what you pay for the product. Some retailers will have freight as a line item on their Profit & Loss Statement. Most international retailers include all costs to get a product to their back door in their cost of goods.
Front Door Margin. Subtract from the Back Door Margin the margin impact of sales due to markdowns. This includes any way that you mark down products: Employee discounts, sale discounts, contractor discounts, liquidation or inventory reduction discounts.
Final Gross Margin. Subtract freight, if you have not already subtracted this, and shrinkage from the Front Door Margin.
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