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CUMULATIVE GROSS MARGIN

Definition
Cumulative Gross Margin (CGM) is a measurement of the effectiveness of your merchandising and profitability of your merchandise. This calculation allows for a comparison of both Gross Margin and Stock Turn Rate (profit and customer appeal) of each classification of merchandise. A fast turning item may have a lower Gross Margin percent where a more profitable item may have a slower Stock Turn Rate and many times the CGM will show that they are equally important. For example a class with a 2.1 Stock Turn Rate and a 66.2 Gross Margin % is equal to a class with a 3.30 Stock Turn Rate and a 42.1 Gross Margin %. Both classes enjoy a CGM of 139. Of course, what every store owner wants are those items that produce a high Turn and a high Profit. 

Calculation
Gross Margin % times Stock Turn Rate = Cumulative Gross Margin

Gross Margin is the difference between Net Sales and Cost of Good Sold. Gross Margin % is based on the relation of Gross Margin to Net Sales, calculated as Gross Margin Dollars divided by Net Sales. For example, if your Total Store Net Sales are $750,000 and the Cost of Goods Sold is $350,000, then the Gross Margin is $400,000. Expressed as a percent of sales, that is 400,000 / 750,000 or 53%. Your Point of Sale software should calculate the Gross Margin % and the Stock Turn Rate for you at the classification level-or even at the vendor level within each class. The goal in apparel stores for Cumulative Gross Margin is between 130 and 150.

Why It's Important
This calculation allows you to see how each classification performed during the past year compared to the other classifications in your store. You can see if Sport Coats are more profitable at your store than say Sweaters. You can compare billfolds to umbrellas to topcoats. You can easily identify your "best sellers" as well as your top or bottom performers in producing profit.

Cumulative Gross Margin should be considered by class annually. Look at the actual performance of each class last year. Rank the items in order from highest CGM to lowest. Then ask yourself those difficult questions. Do I want to continue to carry ________? Would a different vendor allow me a higher Gross Margin % or be more popular with my customers and give me an improved Stock Turn Rate? Or do I continue to carry this merchandise, knowing it is not highly profitable, to bring in customers who usually purchase other items? Is there anything I can do to improve the Stock Turn Rate or Gross Margin of this merchandise?

If you understand the profitability of merchandise by class (or vendor if you choose and your software allows it), it may help you determine what appeals most to your customers so that you have the best possible choices available at any given time.

Increasing Profitability by Using a Gross Margin Plan
The Gross Margin Plan is a very important step in planning for a successful future. I recommend the Gross Margin Plan be calculated for next year at or near the conclusion of an Open-to-Buy year. Checking which classes of merchandise you expect to earn most of your profit from will help you to determine products to feature and how to feature them to produce the best Gross Margin. Also, it is not good when best-selling items show up in the bottom ten profitability performers based on CGM. The time to address that issue is the moment it is uncovered. By preparing the Gross Margin Plan before the year starts, you will be ahead by knowing where your problem areas are so you can take steps to improve the situation.

Consider your lowest performers first. What can be done to improve their performance? Some suggestions are to try a new vendor that will allow for a higher Initial Markup. Sometimes it's as easy as holding back 30%-40% of your Open-To-Buy for in-season purchases at discounted cost. Generally, in season purchases allow for a higher gross margin because their cost to you is less. At this point in the season you know what classes, vendors or items to look for. 

Also, take a good look at the top ten performers. These classifications may be able to support a slightly faster turn that can make a difference in inventory levels. A smaller investment in inventory will save you money and usually improve your Net Profit. Always try to improve your Profit.

Other Details
While CGM is similar to Gross Margin Return on Investment, it is not identical. Cumulative Gross Margin is based on inventory at retail. GMROII is based on average Inventory Cost from the Balance Sheet. GMROII answers the question "For each dollar at cost, how many gross profit dollars will I generate?" CGM answers the question "How profitable are the sales of ____________ compared to the sales of ______________?" It lets the retailer compare the profitability of each classification of merchandise in the store.

Cumulative Gross Margin is an often overlooked but very important aspect of the Open-to-Buy. Too many items remaining at the end of the season will lower the Cumulative Gross Margin (lower Stock Turn Rate) as will items moved via excessive Markdowns (lower Gross Margin %). Items that sell briskly with a good Gross Margin will increase the Cumulative Gross Margin. If a line was purchased that was not to your customer's liking for any reason, it will remain on your store shelves and show up in the Cumulative Gross Margin numbers.

Properly using an Open-To-Buy is the best way to maximize your profit. If you would like help managing your inventory, as well as preparing a Gross Margin Plan for your store, please visit our Open-To-Buy information page or contact us. We want you to achieve the most profit possible. Preparing and reviewing the Gross Margin Plan is a good step in the right direction.

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