Part 1 · Keeping the books · Chapter 1.13
Stock and margin
Draft: the wording may change.
The idea
Every carton in the godown is money you already paid, waiting to come back. It is cash on the shelf. Margin is the small part of each sale that stays in your hand after the cost of the goods. A stockist earns a thin margin many times over, so stock that sits still is cash that has stopped working.
Cost of goods sold
Chapter 1.9 left out the cost of goods to keep things simple. Here it is. You cannot know the cost of each packet sold by memory, so you work it out from the shelf:
Opening stock + Purchases − Closing stock = Cost of goods sold
At the counter: one month
October for a small stockist, all at purchase cost and without GST:
| ₹ | |
|---|---|
| Opening stock, 1 Oct | 2,00,000 |
| Add: purchases in October | 5,00,000 |
| Less: closing stock, 31 Oct (counted) | 2,20,000 |
| Cost of goods sold | 4,80,000 |
| Sales in October | 5,10,000 |
| Gross margin | 30,000 |
| Less: salaries, rent, van fuel, power | 22,000 |
| Net profit | 8,000 |
Look at the two big numbers on that page. ₹2,20,000 is sitting on the shelf. ₹8,000 is what the month earned. If ten cartons expire, or the van comes back ₹5,000 short and nobody explains it, most of the month's profit is gone.
Margin and markup
People mix these up at the counter.
- Margin is profit as a share of the selling price.
- Markup is profit as a share of the cost.
A packet bought at ₹94 and sold at ₹100 earns ₹6. Margin: 6 ÷ 100 = 6%. Markup: 6 ÷ 94 = about 6.4%. When the company says "your margin is 6%", it means on the selling price. Work out your prices from cost with that in mind, or you will sell slightly cheaper than you think on every packet.
Valuing the shelf
Closing stock is counted, then valued at what it cost you — not at MRP or your selling price. If some stock is damaged or so close to expiry that it will sell for less than its cost, value it at what it will actually fetch. Never value it higher than cost.
Common mistake
Valuing closing stock at selling price, or counting expired and damaged cartons as good stock. Closing stock is subtracted in the cost formula, so every rupee of extra closing stock adds a rupee of profit that doesn't exist. The books show a good month, tax is paid on it, and the loss arrives later when the stock is thrown away.
Where you'll use this
In Part 3, the price ladder shows where your margin sits between the company's price and the retailer's, and the order cycle shows how many days of stock to hold. Both are this chapter's two numbers — margin per packet and cash on the shelf — seen from the company's side.
Check yourself
- Opening stock ₹50,000, purchases ₹1,50,000, closing stock ₹60,000. What is the cost of goods sold?
- A packet costs ₹47 and sells for ₹50. What is the margin?
- Why does valuing closing stock at MRP make profit look higher?
Answers
- ₹1,40,000 (50,000 + 1,50,000 − 60,000).
- ₹3 on ₹50, so 6%.
- Closing stock is subtracted to get the cost of goods sold. A higher closing stock means a lower cost and so a higher, false profit.