A Case for Hybrid Merchandise Financial Planning

The Benefits of Blending Retail and Cost Methods of Accounting

It’s widely understood that a retailer’s most important – albeit most expensive – asset is its inventory. To maximize profits, retailers must have the right type and amount of inventory on hand. They also must establish how much the inventory is valued at to determine how best to price it, how much it can be marked down throughout the season, and ultimately if they should buy more of the same product or invest in something else.

Historically, financial planning has been a predominantly pre-season, spreadsheet-driven step within the integrated retail framework planning process. As high-volume, big-box and department stores selling many different items at low unit prices sprang up in the 1960s and 1970s, most retailers adopted an accounting approach called the Retail Method. The Retail Method was advantageous because, for the first time, it eliminated the tedious, time-consuming process of manually recording each transaction in a ledger in an era when sales for goods began to exponentially increase. It calculates a store’s total inventory value by taking the total retail value of the items, subtracting the total sales, then multiplying that dollar amount by the cost-to-retail ratio – i.e., the percentage by which goods are marked up from their purchase price.