How to Write a Business Plan

120 | HOW TO WRITE A BUSINESS PLAN

Here’s how to do it the right way. First,
take a physical count of all your merchan-
dise for resale every year or every few
months. Even if you have a computerized
inventory system that can tell you how
much inventory you have at any time, it’s
a good idea to take a physical inventory
every six or 12 months to reconcile the
real inventory with the computer inventory.
Once you have a complete listing of the
description and count of all the goods
in your store at a particular date, then
you apply the best figures you have for
what the merchandise cost you when
you bought. Multiplying the unit cost of
each item on your shelves by the number
of items you have and adding purchases
during the period gives you the cost of the
goods available for sale. While there are a
number of different theories on which cost
figure to use (the latest or the earliest), the
critical thing is to make sure you do it the
same way every time. Then, you can make
accurate comparisons from year to year. Of
course, if you have a service business or
business with no inventory, the inventory
valuation discussion is moot.
After you have developed a total dollar
value of the goods you have on hand, you
can calculate your real cost of sales this
way:

1. Add together the goods you pur-
   chased during the period and the
   inventory amount at the beginning
   of the period. (This total represents
   the dollar value of the goods you had
   available to sell during the period.)
   2. From that amount, subtract the dollar
   value of the inventory at the end of
   the period.
   3. The difference is the cost of sales for
   the period.
   Here’s an example that demonstrates
   how you do this:

Cost of Sales

Beginning Inventory from

physical count $ 10,000

Add: Purchases during period + 30,000

Subtotal: Goods available for sale 40,000

Less: Ending Inventory from

physical count – 15,000

Cost of Goods Sold during period $ 25,000

This calculation has more use than

merely filling out IRS forms: It can let you

know when someone is stealing from you.

Suppose you have a good estimate of what

the cost of sales percentage should be,

either from past statements or from a good

understanding of your business. Suppose

further that you expect a cost of sales of

61.5% and that you actually had a cost of

sales of 77.3%. What does that mean? It

could mean that some of the merchandise

you buy for resale is leaving the store

without any money entering your register.

At any rate, it means that you need to do

some serious research to find out what is

really happening. ●