IMU Matters
Have you ever wondered how much you need to sell at full price to be profitable? Below is a simple chart that identifies the sell thru %. Below is a simple chart that identifies the sell thru %. This is based on generating a cash margin of 48%.
Target Revenue = $1,000,000
Target Cost of purchases = $520,000 52%
Target Gross Profit = $480,000 48%
Budgeted Expenses = $400,000
Target Profit Profit = $80,000
You can see that at an initial markup (IMU) of 50%, you need a 96% sell-through at regular price to achieve a 48% cash margin and the $80K targeted net profit. At 60% IMU, you only need a 77% sell-through and at 70% IMU this drops to only a 58% sell-through.
Once you achieve those sell-through numbers you can mark down the inventory or give it away. Your mission is accomplished and all additional sales are upside. Obviously, as your IMU goes up and your sell-through is higher than the target, you are creating even more excess cash to reinvest in the business.
IMU matters as each item you sell at a higher markup increases revenue, thus lowering your fixed expenses as a percentage of your volume and thereby allowing you to hit your breakeven earlier in the year. Higher IMU also provides a cushion for markdowns. A strategy to increase margins is to have a variety of classes that offer different initial markups. Some vendors in certain classifications have a ceiling. That is why having and building other classifications that can deliver a higher yield is a valuable strategy to increase your overall margins. Also, private labels offer higher IMU’s as well as exclusivity, which can protect against the need for markdowns if you’ve got the right items.
Understand what all of your P and L and balance sheet expenses (i.e., your cash expenses to operate the business) are as a % of your total volume. Once you know that you can determine the target IMU that best fits your cash profit goals, keeping in mind that you will also need a reasonable estimate of markdowns.
Comment below and feel free to make an appointment with me if you want to discuss your own situation or you can discuss with your Management One Retail Expert.
Onwards, and Upwards,
Marc Weiss - Co-founder, Management One