Retail math is used daily in various ways by store owners managers retail buyers and other retail employees to evaluate inventory purchasing plans analyze sales figures add on markup and apply markdown pricing to plan stock levels in the store Although most accounting programs do the math for you as a business owner or accountant you should know the most common retail math formulas that are used to track merchandise measure sales performance determine profitability and help create pricing strategies Acid Test Ratio This is a measurement of how well a business could meet its short term financial obligations if sales suddenly stopped The purpose of this calculation is to determine how easily a company could be liquidated and helps financial institutions determine creditworthiness The easier it is to liquidate the less risk to the bank or financial institution Retail stores may have very low acid test ratios without necessarily being in danger For instance for the fiscal year ending January 2017 Walmart Inc s acid test ratio was 0 22 while Target Corp s was 0 29 equating to ratios of 0 86 and 0 94 respectively Acid Test Ratio Current Assets Inventory Current Liabilities Average Inventory This can be figured by taking an item price and subtracting discounts plus freight and taxes The average is found by adding the beginning cost inventory for each month plus the ending cost inventory for the last month in the period If calculating for a season divide by 7 If calculating for a year divide by 13 Here s a cost example If a clothing retailer has an average inventory of 100 000 and the cost of goods sold is 200 000 then you would divide 200 000 by 100 000 to give you a ratio of 2 1 which can be expressed simply as 2 Average Inventory Month Beginning of Month Inventory End of Month Inventory 2 Break Even Analysis This is the point in your retail business where sales equal expenses There is no profit and no loss For example for a retail store rent is likely to be the same regardless of the number of units sold Break Even Fixed Costs Gross Margin Percentage Contribution Margin This is the difference between total sales revenue and total variable costs In retail the gross margin percent is recognized as the contribution margin percent This is useful information for deciding whether to add or remove products and make pricing decisions Contribution Margin Total Sales Variable Costs Cost of Goods Sold This is the price paid for a product plus any additional costs necessary to get the merchandise into inventory and ready for sale including shipping and handling This method is pretty straight forward and very easy to use and implement in a low volume high cost per item retail format Gross Margin This is simply the difference between what an item cost and the price for which it sells For example if Store A and B have the same sales yet Store A s gross margin is 50 percent and Store B s gross margin is 55 percent it s easy to see which store is faring better Gross Margin Total Sales Cost of Goods Gross Margin Return on Investment GMROI GMROI calculations assist buyers in evaluating whether a sufficient gross margin is being earned by the products purchased compared to the investment in inventory required to generate those gross margin dollars For example if your store has a sales volume of 1 million a year on an average inventory of 500 000 that would be pretty good But 1 million on an average inventory of 200 000 though uncommon would be even better GMROI Gross Margin Average Inventory Cost Initial Markup Initial markup IMU is a calculation to determine the selling price a retailer puts on an item in their store Some of the things that affect initial markup are brand competition market saturation anticipated markdowns and perceived customer value to name a few Inventory Turnover Stock Turn Inventory turnover is how many times during a certain calendar period a retailer sells its inventory and replaces it Turnover Net Sales Average Retail Stock Margin This is the amount of gross profit a business earns when an item is sold For example if you have to pay 15 for each sweater and you then sell it to customers for 39 your retail margin equals 24 Margin Retail Price Cost Retail Price Net sales is the number of sales generated by a business after the deduction of returns allowances for damaged or missing goods and any discounts allowed Net Sales Gross Sales Returns and Allowances Open to Buy OTB is the difference between how much inventory is needed and how much is available That includes inventory on hand in transit and any outstanding orders OTB retail Planned Sales Planned Markdowns Planned End of Month Inventory Planned Beginning of Month Inventory Sales per Square Foot The sales per square foot data is most commonly used for planning inventory purchases This data can also roughly calculate return on investment and is used to determine rent at a retail location Sales per Square Foot Total Net Sales Square Feet of Selling Space This figure is a comparison of the amount of inventory a retailer receives from a manufacturer or supplier to what is actually sold and is typically expressed as a percentage Sell Through Units Sold Units Received Stock to sales ratio is the beginning of the month stock to the number of sales for the month The key takeaway is that this ratio is a monthly metric Stock to Sales Beginning of Month Stock Sales for the Month Net Sales Open to Buy Sell Through Rate Stock to Sales Ratio