Cash Rate of Sale, Rate of Gross Profit

The cash rate of sales (i.e. the rate of sales in value terms) and the rate of gross profit are computed as follows:

$$ \text{Cash Rate of Sales = Selling Price × Rate of Sales} $$ $$ \text{Rate of Gross Sales = Margin × Cash Rate of Sales} $$

Unit, volume, value and profit are the different measures used to express the movement of goods. Production, purchasing and logistics work with units. The factory manager needs to know how many jars of coffee need to be produced.

Volume is the measure for the size of the market. For FMCG products kilogramme or litre usually is appropriate. Some products however are available in different forms. Coffee for instance is available in the form of powder and 3-in-1 sachets. The appropriate measure would be to translate the volume of these forms into an equivalent representing number of cups of coffee.

From a financial standpoint, sales value and profit are of prime importance. Money is required to pay for raw materials and supplies, salaries, taxes, dividends and so on.

Exhibit 30.5    Distribution of profit from the sale of goods.

Exhibit 30.5 depicts how the $100 selling price for a product gets distributed across the various stakeholders — manufacturer, retailer, suppliers and government. In this example the manufacturer makes a margin of 35%, and the retailer’s gross margin is 10%.

The notion of turns × earns sums up the retailing business model. It captures the two main components of retailing — to maximize the margins (earns) and the times they can earn that margin, i.e. the velocity of inventory turn. Turns are calculated by dividing the sales (cost of material sold) by the inventory (average inventory value). Earns is the gross margin. Categories tend to vary from high earn and low turn to low earn and high turn. The margin for products with high turns, detergents or cooking oils for instance, will tend to be lower than those with low turns, such as facial care and books. Retailer margins, for the majority of FMCG goods tend to lie between 5% and 30%.

Exhibit 30.6   Comparison of rate of sales of four shampoo brands.

Exhibit 30.6 provides a fictitious example for the rate of sales comparisons of four shampoo brands. Among the four brands, Sunsilk is the top brand consumed by shoppers and it contributes more than the other brands to the retailer’s gross profit. Dove on the other hand, is a profit generator; its rate of gross profit is comparable to that for Sunsilk, despite much lower rate of sales.

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