Retail Math: Definition and Examples
Updated January 30, 2023
Learning about some of the most common retail math formulas can help you better evaluate your own skills and where you need to improve. Developing strong retail math skills can also qualify you for more advanced roles in that industry.
In this article, we discuss what retail math skills are, different kinds of retail math skills and how you can improve your own skills in this area.
What is retail math?
Retail math refers to the math skills that managers and sales associates use to perform tasks, both at the retail level and the manufacturer level. Retail math is necessary for:
Conducting sales transactions
Calculating sales tax and shipping charges
Calculating stock turnover
Interpreting profit and loss statements
Calculating gross margin and break-even points
Types of retail math
There are several different types of math formulas that companies use to determine profitability, track merchandise, measure a company's sales performance and identify new pricing strategies. They include:
Companies use this formula to evaluate how well they could meet their short-term financial obligations if all sales suddenly stopped. Financial institutions use this formula to determine how easily a company could be liquidated. If a company is easy to liquidate, a bank or financial institution views it as less of a risk. The formula you use to calculate a business's liquidity is:
Acid-test ratio = Current assets - Inventory / Current liabilities
The average inventory formula calculates the average amount of inventory in stock within a certain time period. To calculate average inventory, take the current inventory balance and add it to the prior inventory balance. You can divide the two to get the average inventory amount. It looks like this:
Average month inventory = (Beginning of month inventory + End of month inventory) / 2
A break-even point is when cost and revenue are equal. It allows companies to determine the number of products or services they need to sell to cover costs. Use the following formula to calculate your break-even point:
Break-even = Fixed cost / Gross margin percentage
Read more: Guide to Break-Even Analysis
A contribution margin shows you the amount of revenue that you earn after variable costs, the expenses that change as the number of goods or services that the business produces changes. This is beneficial, as it helps you understand whether to add or remove products and make decisions about product pricing. The formula for contribution margin is:
Contribution margin = Total sales - Variable costs
Cost of goods sold
Cost of goods sold refers to the direct cost of producing a company's products. It is the accumulated total of all costs, including labor, materials and overhead, including shipping and handling.
Gross margin is the difference between the cost of an item and the price it sells for. To calculate gross margin, you use this formula:
Gross margin = Total sales - Cost of goods
Gross margin return on investment
This formula allows a company to evaluate whether the gross margin for products that the company purchased is significant enough when compared to the investment the company made into its inventory. To calculate gross margin return on investment, you can use the following formula:
GMROI = Gross margin / Average inventory cost
This formula allows a company to see how many times a retailer sells and replaces its inventory. To calculate inventory turnover, use this formula:
Turnover = Net sales / Average retail stock
Margin is the amount of gross profit that a company earns after selling a product or service. To determine the amount of margin on your products, you can use this formula:
Margin = (Retail price - cost) / Retail price
Net sales refer to a company's total revenue minus any returns, discounts and allowances for damaged or missing products. You can use this formula to calculate your net sales:
Net sales = Gross sales - Returns and allowances
Open to buy
Companies use this formula to help them manage and replenish their inventory. Open to buy calculates the difference between the amount of inventory that the company needs versus the amount that's available. To calculate open to buy, use the following formula:
Open to buy = Planned sales + Planned markdowns + Planned end of month inventory - Planned beginning of month inventory
This formula allows you to compare the amount of inventory that you receive versus what you actually sell to customers. Here is the formula you use to calculate:
Sell-through percentage = Units sold / Units received
How to improve retail math skills
Improving your retail math skills involves improving your basic math skills to more easily calculate transactions and utilize the formulas provided above. The steps you can take to improve these skills are:
1. Master the basics
Start by learning the basic retail math concepts. You may want to consider enrolling in a class locally or taking a math course online to understand these. Reminding yourself how to do basic addition, subtraction, multiplication and division, and learning how these skills work in a real-world environment can help you advance to more complex retail math skills.
2. Learn new concepts
Once you understand the basic retail math skills, you can start learning new concepts, such as how you can apply the retail math formulas listed above. A classroom is an ideal setting for learning these new concepts, as it allows you to ask questions and apply new concepts to a retail environment.
3. Practice problems
Start practicing retail math regular regularly. Practice math formulas from your workbook or find practice problems online specifically related to the retail niche. By practicing these skills regularly, you will be better able to absorb them.
4. Apply skills in the workplace
Finally, start applying the retail math skills you're learning in the workplace. Incorporating it into your normal routine will help you become more comfortable with the concepts you've learned—both the basic ones and the more advanced retail math formulas.
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