Stock-taking is not just for preventing theft
The Sunday Nation
Nairobi,
20 February 2011
This is the typical scenario in a shop: you buy different types of goods and start selling them; before the stock is finished, you add some more and continue trading. It sounds easy, but how do you tell how much money you are making?
The calculation gets more complicated because different goods have different mark-ups depending on market forces. In addition, some customers are better at bargaining than others, so one product may be sold at different prices. And as if that was not enough, some of the buying prices will change from one purchase to the next.
To illustrate how to go about the working, suppose you open a shop today and start by buying 20 loaves of bread at Sh25 each. Then you start selling them at Sh30.
Since you shop is new, you probably sell only five loaves on the first day. Then on the second day you do a little better by selling seven loaves. Seeing this improvement, you purchase another 20 to add to your stock.
Let us now follow the money. On the first day you spend Sh500 buying the initial stock, but you also sell five loaves for Sh150. On the second day you make Sh210 in sales but you spend Sh500 on additional purchases.
So in two days, you have spent a total of Sh1,000 and sold goods worth Sh360. That is; Sh1,000 goes out while only Sh360 comes in. Is this business really making a profit?
Of course it is; after all, you are buying bread at Sh25 and selling it at Sh30. But where is the money? Answer: it is held in the unsold stock.
So let us follow the bread. You bought a total of 40 loaves worth Sh1,000; now you are left with 28 (40 minus the 12 sold) valued at Sh700. Therefore, the value of the ones you sold is Sh1,000 minus Sh700; that is, Sh300. Thus the profit made is Sh360 – Sh300 = Sh60
Of course it is easier to do it this way: you sold 12 loaves of bread making five shillings on each (Sh30 – Sh25), therefore the total profit is Sh60 (5 x 12). However, when you have many different items with varying mark-ups, it becomes very difficult to track down the profit made on each sale. It is therefore easier (not necessarily easy) to find out the value of the sold goods and then subtract it from the sales made.
The value of the sold good is found as follows: add the value of the stocks at the beginning to the purchases made. Then subtract the value of those remaining unsold.
In our shop example, you started with zero stock, then added Sh1,000 worth of goods and after the two days you had Sh700 worth of unsold bread.
Clearly then, it is very important for a trader to count and establish the value of the goods in the shop. Stock-taking is not just for checking theft: it also helps in figuring out how much profit you are making.
 |
 |