Maintaining tight inventory levels is good business. Good inventory levels keep the cost of goods reasonable and allow any business to be in a position of profitability. However, any loss of inventory due to theft, error, waste or damages will impact the overall cost of goods sold. An increase to costs of goods will most certainly impact your profitability and margin.
Have you ever calculated the impact one stolen item can cost your business?
Do you how many items you would need to sell to make up for the loss of a single item?
If you have never looked at the true cost of a single theft or loss, you may be surprised to learn how much it can affect your business profitability and cost of goods. Let’s take a look.
For our example we will use some small and basic calculations. First, let’s calculate a cost of goods sold, revenue and profit for an item we will sell.
- Our item costs us 30 cents each to purchase from our vendor
- The business overhead for this item is 20 cents
- The costs of goods sold for this item is 50 cents each
- We sell each item at retail for $1.00 each
If we were to sell two items, we would make the following; $2 in revenue and $1 in total profit (50 cents profit from each item)
Now, let’s say that instead of selling 2 items, 1 item was sold and 1 item was stolen by a shoplifter. What would our revenue and profit look like now?
For the sold item we made $1 in revenue and 50 cents in profit. For the stolen item we made zero dollars in both revenue & profit.
So what is the net result for total revenue and profits for our 2 item inventory?
Total Revenue = $1
Total Profit = $ZERO
Our net result is zero profit because your total cost of goods increased ($1 for both items) and is now equal to your total revenue of $1.00 for the combination of both items.
Any guess on how many items must be sold to get back the lost profitability of that one stolen item?
Saving you from a mathematical headache, we did the math. To get back the lost 50 cent profit of that one item stolen and to get back to a 50 cent cost of good for each item, you need to sell 101 items! Yes – 101 items to get back 50 cents of profit!
Sometimes the truth can really hurt (your profits).
For more information on how you can decrease the likelihood of loss within your business, visit our Loss Prevention 101 section on our website. There you can learn more about preventing loss and increasing the profitability of your business.