Overview of Retail Finance

Written by Nithin Narayanan

 
Retail finance can be defined as an overview of which products are purchased, in what quantity, and when these are purchased. Financial planning consists of methods of accounting, merchandise forecasting and budgeting, unit control system and financial inventory control.

 There are two accounting systems that the retailer can use. They are-

 
     Cost method

     Retail method of Valuation.

 
In the cost method the retailer has to maintain a careful record for each item which is purchased. This is necessary to calculate the value of ending inventory at cost. As far as the retail method is concerned, closing inventory value is calculated by the average relationship between the cost and the retail value of the merchandise. This kind of method will accurately reflect the market conditions, but it is more complex. For example in case of Inflation the merchandise would be priced higher as it might bear the added cost of raw materials, and cost of operations. This is also dependent on the scale of operations as the scale if bigger, would offset the inflationary rise in prices to a large extent.

 
Merchandise forecasting and budgeting is a control system consisting of various steps-

 
Designating Control units.

Sales forecasting

Inventory level Planning

Planning retail reduction

Planning purchases and

Profit margin Planning.

 
Control units are merchandise category for which data is gathered. They must be narrow enough to identify opportunities or problems. Inventory planning is the process through which the retailer sets the merchandise level during a particular period. Retail reduction means reduction due to markdowns, discounts, sales etc.

 
There are various ways of doing retail finance which will be covered in the subsequent articles.