Synergy between Higher Top-Line / lower COGs

Does anyone have a formula or article discussing, ANYTHING they can point me to, to explain the synergy between higher top-line and lower COGs?

It's easy to understand lower labor, location expense, etc in this scenario, but not the COGs. Yet the CoGs are undeniably higher in slower stores all things being equal. Two of the same stores, for instance, needing to carry the same supplies.

I understand that the slower store still has to buy the same case of 1,000 cups or case of mustard, case of straws, etc, and then is forced to sit on it till stock depletes, but is there a formula to prove this? How it effects the COG's detrimentally.

Any articles anyone can point me towards?

Thanks

I can't point you toward an article, but I do have a few thoughts for your consideration. Larger volume operations turn over their inventory more often. Less waste through spoilage. Theft is another area. If an employee is stealing $100 worth of product a week in a $10000 a week operation, that's 1%. If that operation is running $20000 a week, it's just .5%. A higher volume operation can potentially buy their goods at lower prices.

Those are just a few ideas off the top of my head. This is an interesting topic, I hope others will chime in with more.

The COGS does not change.

If you buy 1000 cups for $1000 the cost of each cup is $1, whether you take a day to sell all the cups or a year. Your COGS is $1000.

The problem you really want to deal with is cash flow in relationship to inventory.

Lets take the same 1000 cups at $1 a piece.
Assume you move 200 cups per month.
Cups are sold for $2.00
If you bought all the cups up front you have $1000 in inventory.
At the end of month 1 you have $800 in inventory and $200 profit.
At the end of month 2 you have $600 in inventory and $400 profit.
At the end of month 3 you have $400 in inventory and $600 profit.
At the end of month 4 you have $200 in inventory and $800 profit.
At the end of month 5 you have $0 in inventory and $1000 profit.
It took you $1000 to make $1000 in profit a 100% return.

Now instead of buying 1000 cups @ $1 a piece
Buy 200 cups @ $1.10 five times over
The cups still sell for $2 and sell 200 a month.
So you are starting with $220 in inventory
At the end of month 1 you have $0 in inventory and $180 in profits.
Take the original $220 and buy another 200 cups.
At the end of month 2 you have $0 in inventory and $360 in profits.
Take the original $220 and buy another 200 cups.
At the end of month 3 you have $0 in inventory and $540 in profits.
Take the original $220 and buy another 200 cups.
At the end of month 4 you have $0 in inventory and $720 in profits.
Take the original $220 and buy another 200 cups.
At the end of month 5 you have $0 in inventory and $900 in profits.

Your profits may be less but you were seeing over 400% return on your investment because you used the same $220 five times over.

Inventory management id key to this issue. Understanding turns etc.
Even if you had the $1000 to spend in the second example would you want to tie up all your cash in inventory even though you technically make more in profits? What would you be able to do with the other $780 in other parts of your business?

Being cash poor in any business is a major problem.

Thank you both.

Also, pdxyyz, your taking the time to draw up your two comparisons may be the very thing I need. Again, I thank you.

Would still love to hear from anyone else on the matter as well.

pdxyyz, I bet you'd make one helluva framing carpenter. You hit the nail squarely on the head and with a coupla solid hits drove it home quite nicely.

quote:

Originally posted by pdxyyz

quote:

Originally posted by jman

pdxyyz, I bet you'd make one helluva framing carpenter. You hit the nail squarely on the head and with a coupla solid hits drove it home quite nicely.

Exactly the opposite jman. I only wish I were a capable carpenter, plumber or electrician. I spend my days working with small business owners, helping them with just these types of issues.

I, too, work with small business owners and have for over thirty years. It always amazes me that most people don't understand the importance of knowing your cost and managing your cash flow.

Whether you're assembling a hot dog or an automobile, the basic principle is the same.

pdxyyz is right. You have to understand that the $1000 outlay in cups is not an expense until the cups are used. That cost goes into an inventory asset account and it remains an asset until you use the cups. The result is that the COGS is NOT really higher for the slower store because of this. Slower stores might have higher COGS for a number of other reasons (e.g. more waste, spoilage, shrinkage due to theft (as mentioned), but the over-stocking phenomenon associated with smaller stores really only impacts the cash flow rather than the expenses.

That makes pdxyyz's (I can barely type that with a straight face) point in the second example worthy of serious consideration. Too many operators are dead set on getting the best deal, which often translates into a high volume buying scenario. You have to start looking at all of your inventory as if it is just little piles of cash. You don't want big piles; you want little piles that you can easily convert into actual cash to keep your business going. I've always found it helpful to walk around the store room with my managers and have them visualize the inventory as piles of cash that can't be spent. That is absolutely the mindset you have to have.