Retail Math Formulas

Math is your friend when trying to run your retail business efficiently.

Close up of exchange of money in shop.
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Retail math is used in various ways by store owners, managers, retail buyers and other retailing employees. It is used to evaluate inventory purchasing plans, analyze sales figures, add on markup and apply markdown pricing to plan stocks.

Although there are computer programs and other tools available, performing these retail math calculations often requires familiarity with formulas. Use the following equations and retail math formulas to track merchandise, measure sales performance and help create pricing strategies.

Acid-Test Ratio

This is a measurement of how well a business could meet its short-term financial obligations if sales suddenly stopped. The purpose of this calculation is to determine how easily a company could be liquidated, and helps financial institutions determine creditworthiness. The easier it is to liquidate, the less risk to the bank or financial institution.

Acid-Test Ratio = Current Assets - Inventory ÷ Current Liabilities

Average Inventory

This can be figured by taking an item price and subtracting discounts, plus freight and taxes. The average is found by adding the beginning cost inventory for each month plus the ending cost inventory for the last month in the period. If calculating for a season, divide by 7. If calculating for a year, divide by 13.

Average Inventory (Month) = (Beginning of Month Inventory + End of Month Inventory) ÷ 2

Basic Retailing Formula

Cost of Goods + Markup = Retail Price
Retail Price - Cost of Goods = Markup
Retail Price - Markup = Cost of Goods

Break-Even Analysis

This is the point in your retail business where sales equal expenses. There is no profit and no loss. 

Break-Even ($) = Fixed Costs ÷ Gross Margin Percentage

Contribution Margin

This is the difference between total sales revenue and total variable costs. In retail, the Gross Margin Percent is recognized as the Contribution Margin Percent.

This is useful information for deciding whether to add or remove products and make pricing decisions.

Contribution Margin = Total Sales - Variable Costs

Cost of Goods Sold

This is the price paid for a product, plus any additional costs necessary to get the merchandise into inventory and ready for sale, including shipping and handling.

COGS = Beginning Inventory + Purchases - Ending Inventory

Gross Margin

This is simply the difference between what an item cost and the price for which it sells.

Gross Margin = Total Sales - Cost of Goods

Gross Margin Return on Investment (GMROI)

The GMROI calculations assist buyers in evaluating whether a sufficient gross margin is being earned by the products purchased, compared to the investment in inventory required to generate those gross margin dollars.

GMROI = Gross Margin $ ÷ Average Inventory Cost

Initial Markup

Initial Markup, or IMU, is a calculation  to determine the selling price a retailer puts on an item in his store.

Initial Markup % = (Expenses + Reductions + Profit) ÷ (Net Sales + Reductions)

Inventory Turnover (Stock Turn)

This is calculated by determining how many times during a given period that a business sells its inventory and replaces it.

Turnover = Net Sales ÷ Average Retail Stock


This is the amount of gross profit a business earns when an item is sold.

Margin % = (Retail Price - Cost) ÷ Retail Price


This is a percentage added to the cost of an item to get the retail selling price.

Markup $ = Retail Price - Cost
Markup % = Markup Amount ÷ Retail Price

Net Sales

Net sales is revenue with any returns and allowances subtracted. Net income any income after subtracting taxes, interest expenses, and depreciation. 

Net Sales = Gross Sales - Returns and Allowances

Open to Buy

OTB is the difference between how much inventory is needed and how much is actually available. This includes inventory on hand, in transit and any outstanding orders.

OTB (retail) = Planned Sales + Planned Markdowns + Planned End of Month Inventory - Planned Beginning of Month Inventory

Sales per Square Foot

The sales per square foot data is most commonly used for planning inventory purchases. It can also roughly calculate return on investment and it is used to determine rent on a retail location. When measuring sales per square foot, keep in mind that selling space does not include the stock room or any area where products are not displayed.

Sales per Square Foot = Total Net Sales ÷ Square Feet of Selling Space

Sell-Through Rate

This figure is a comparison of the amount of inventory a retailer receives from a manufacturer or supplier to  what is actually sold .

Sell-Through % = Units Sold ÷ Units Received

Stock to Sales Ratio

This calculates the beginning of the month stock to the amount of sales for the month.

Stock-to-Sales= Beginning of Month Stock ÷ Sales for the Month

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