How to Budget Your Purchasing

Written By:
Jay Jacobowitz
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If you are like most natural products retailers, you order weekly from many wholesalers; large distributors, direct vitamin companies, and more than a few small vendors of miscellaneous brands. And as you know from experience, it is easy to blow a hole in your checkbook by overbuying. Here’s a simple rule-of-thumb to help you keep your inventory in line with your sales and your checkbook in the black.

For the typical independent natural products retailer that sells both food and vitamins, about half of all wholesale purchases go through one or two large distributors, and the other half goes for direct vitamin lines. Also for a typical retailer, overall average cost-of-goods-sold is about 60 percent, with 40 cents of every dollar going toward gross profit.

Using this basic formula; 30 cents of every sales dollar for your major distributors, 30 cents of each sales dollar for your direct vitamin lines, and 40 cents of every sales dollar for your profit, you can quickly create a weekly wholesale purchasing budget your buyers can follow.

To ensure your purchases more closely track your sales, it is better to use a four-week rolling average of your total sales. Let’s look at an example of how this works:

Week 1 

Total Weekly Sales
$12,200
Week 2  8,400
Week 3  10,300
Week 4  11,100
4-week average  10,500
30 percent (30 cents) for distributors   3,150
30 percent (30 cents) for direct vitamin lines  3,150
40 percent (40 cents) for gross profit  4,200

 

Week 1

Total Weekly Sales
$12,200
Week 2  8,400
Week 3  10,300
Week 4  11,100
Week 5  10,200
rolling 4-week average  10,000
30 percent (30 cents) for distributors  3,000
 
30 percent (30 cents) for direct vitamin lines  3,000
 
40 percent (40 cents) for gross profit  4,000

In the upper table, your four-week average total sales are $10,500. This means you can give your major wholesalers $3,150 and you can spend $3,150 on your direct vitamin lines and other miscellaneous small vendors.

In the lower table, we’ve added a fifth week of sales ($10,200), and dropped your oldest week of sales out of the average (-$12,200). This drops your four-week average to $10,000, and means you can spend $3,000 with your major wholesale distributors and $3,000 on everything else.

Using the rolling four-week average will help keep your buying in line with your latest overall sales trend, smoothing out weekly ups and downs, and taking the guesswork out of how much to spend to keep your checkbook in the black.
I’d love to hear your experience with budgeting, so please share it with me by email or phone. WF

Jay Jacobowitz is president and founder of Retail Insights®, a professional consulting service for natural products retailers established in 1998, and creator of Natural Insights for Well Being®, a comprehensive marketing service designed especially for independent natural products retailers. Jay is next scheduled to exhibit at National MarketPlace (Booth 625), June 24–26, 2011, in Las Vegas. He can be reached at (800)328-0855 or via e-mail at
 
jay@retailinsights.com.