Importance of Buying.—Buying as a major function in a mercantile concern is intimately related to, and dependent on, the other functions of the business. Buying must always have regard to the sales activities. To buy without reference to the ability to sell is suicidal. Both overbuying—buying more than can be disposed of at a profit—and underbuying—buying less than is needed to meet the sales demand—are conditions to be avoided. Underbuying means a loss of sales. Unless their needs are met promptly in accordance with their orders, customers will go elsewhere. Overbuying means the unnecessary tying up of capital in a stock of goods which increases the possibilities of loss resulting from changes in fashions and the level of prices. The relation of the rate of turnover to profits in merchandising was discussed in Chapter VII. Manifestly the ideal situation, so far as the amount of stock carried is concerned, is one in which the least amount of capital is used to provide an adequate stock for meeting the requirements of customers and in which the loss from unsalable stock is reduced to the lowest level.

Many business houses fail to realize the wastes resulting from slow turnovers. The Chamber of Commerce of the United States has called attention to these losses and has analyzed them under the following heads:

Relation between Buying and Finance.—From what has already been said, it is evident that there is a very necessary relation between the buying policy of a business and its ability to finance purchases. Even though it may be possible to increase sales, unless the business is in a position to finance not only the additional credits extended to customers but also the additional purchases needed to take care of the increased sales, it will not be feasible to pursue a policy of sales expansion and therefore of increased buying. Hence, buying cannot be considered as a business activity by itself, but as one dependent upon the sales activities and the financial resources of the business.

Organization for Buying.—In large merchandising businesses the duties and authority of the buying department are not uniform. In some, this department is organized entirely distinct from the selling department; in others (and this is particularly true of the large department stores), the buyer is head merchandise man with control over the selling activities of the business. It is also quite usual for the buyer to be in charge of a given department and his success or failure to be judged by the profits he makes in that department. A profit quota is sometimes assigned to each department, for which the buyer is responsible. In other words, in the management of the buying and selling activities and therefore in the control of his merchandise stock the buyer is supreme, subject to the general limitations placed by the financial resources at his disposal. Under the control of the buyer, therefore, will be stock clerks, the clerks which mark and re-mark the merchandise, and the sales force. Above and in control of all the departmental buyers is usually an executive or high official of the company whose chief function is to correlate the activities of the buyers with the concern’s general buying, selling, and financial policy.

Characteristics of the Buyer.—To perform his functions properly, the buyer must be a man of broad experience, with a keen sense of values and the marketing possibilities of merchandise. On the buying side he must have complete information as to the available sources of the merchandise he desires to secure, both in staple and in novelty lines. On the selling side he must know the demands of his customers and the possibility of creating new demands. The best index of the buying power of his customers is the volume of sales made in previous years. Past performance, considered in connection with general trade conditions and plans for the further development of the business, is the only basis for judging the sales possibilities of the future. He must know the quality of merchandise and the reliability of the people from whom he buys. He must be a keen judge of prices. He must know the financial resources of his own store and strive to secure the best possible credit and discount terms.

Buying Procedure.—In Chapter XXII, where the goods invoice was discussed, a typical purchasing procedure was set forth. Here only the chief points in that procedure will be mentioned. In a large establishment the buying requisition should be the basis of all purchase orders. This is particularly true when the buyer does the buying for several departments. The requisition should be made out in triplicate by the department head, two copies going to the buyer and one being retained in the department. Upon the issuance of the buying order, the second copy of the requisition is returned to the department as evidence that the goods have been ordered.

The purchase orders are made in manifold, the original going to the vendor, one copy to the treasurer to notify him of the future need for funds, one to the controller or accounting department, and one being retained by the buyer as a basis for follow-up. Upon receipt of the invoice, which usually precedes the goods, the buyer compares it with the order and if it is found correct, he passes it to the accounting department, where it is held until the receiving slip, showing the receipt of goods, is received from the receiving room. If the three documents now in possession of the accounting department, namely, the copy of the original order, the invoice, and the receiving slip, agree, the invoice is passed for entry on the books and is filed for payment in accordance with the financial policy of the business. After payment, the invoice with its supporting documents is filed. Great care must be exercised to make sure that an invoice is not put through more than once for payment and that every invoice represents goods properly ordered and actually received.

Requirements of Successful Buying.—Successful buying rests on a knowledge of two things: (1) when to buy, and (2) what to buy. The timeliness of buying has regard rather to the sales requirements than the market possibilities. Goods are bought for the purpose of satisfying needs of customers. A knowledge of the trend of the market is necessary but buying wholly in accordance with market trends too often leads to speculation in merchandise, due weight not being given to the sales requirements. A knowledge of the specific commodities needed to satisfy the requirements of customers is equally important. The regular use of the “want slips” of customers calling for goods not in stock is one source of information. The records of the paid “shoppers” as to the commodities and prices of competitors is also some indication.

In answering both these questions, when to buy and what to buy, the records of the business itself should furnish the fundamental information needed to secure a proper control of the movement of merchandise. Some system of perpetual inventory is almost indispensable. In a small business where the buyer, usually the owner, is in intimate contact with all departments, a fairly satisfactory control of merchandise can be secured without a perpetual inventory. In a business of some size, however, the perpetual inventory is an almost absolute essential if movement of stock is to be kept under control.

Control of Merchandise Movement.—The beginning of merchandise control is the fixing of the sales quota, that is, the making of an estimate of sales for the next period. Without a definite goal to be aimed at control is impossible. Buying and finance are dependent on it. A knowledge of the stock on hand at any time is needed to determine the buying requirements. Even in a small business the inventory can at least be estimated on the basis of past performance as to percentage of gross profit and therefore the percentage of cost of goods sold. The application of this figure of percentage of cost of goods sold to the sales for the period gives the cost of goods sold, which, subtracted from the opening inventory plus goods purchased, gives an estimate of the goods in stock. A perpetual inventory kept by quantities rather than by values serves the purpose in many establishments. What is known as the “retail system,” by means of which the value of the stock on hand can be estimated at any time, is used in many large retail establishments. In addition to, and in conjunction with such a system, the use of commodity control cards, as illustrated in Form 43, gives a sure index of the condition of stock and the movement of merchandise at any time.

The Retail Method of Inventory.—The retail system of inventory is based on the carrying of all goods purchased at a retail sale price as well as at cost price. In the financial records purchases are, of course, always booked at cost. A stock record is kept, however, which carries purchases at retail sale price as well as at cost price. The principle of the perpetual inventory under this method is shown by the fundamental formula:

Opening Inventory + Purchases- Cost of Goods Sold

= Final Inventory 

It is apparent that if all the values on the left side of the equation are retail sale values, the right side of the equation represents the final inventory valued at the retail sale price. Thus, if the opening inventory for use in the stock record is set up at the marked sale price, and purchases are similarly set up, the subtraction of the sales to date from the sum of the opening inventory and purchases gives the amount of stock on hand valued at the sale price.

In order to reduce an inventory, valued at retail sale price, to a cost basis, the per cent of mark-on of the cost price to give the original sale price must be applied. This per cent is based on the sale price and not the cost price, being determined by dividing the difference between sale and cost price (that is, the gross profit figure) by the sale price. Thus, a commodity, costing $60 and marked to sell at $100, will, if sold, yield a gross profit of $40, which, given in terms of the sale price, is a 40% gross profit. This 40% is spoken of as the “mark-on per cent.” The cost is, therefore, the difference between 100% and the per cent of mark-on, in this case 60%. That is, 60% of the sale price gives the cost price.

Accordingly, to reduce the inventory value at selling price to a cost price basis, it must be multiplied by 100% minus the per cent of mark-on.

The use of the retail method is thus seen to require a stock record from which the goods on hand as valued at selling price can be determined almost instantly and from which the per cent of mark-on can also be determined. In principle the method is simple. In practice it must be operated very carefully, else unreliable results will be secured. It seldom happens that merchandise will always move at the marked sale price. Adjustments are necessary. On an upward market, perhaps, a higher price can be secured than the marked price. On a downward market or in order to move certain colors and styles, it is necessary to mark down from the original sale price. The fluctuations arising from mark-ups and mark-downs are treated in Chapter XI of Volume III and will not be discussed here. Some applications of the retail method will be explained, however.

Some Buying Records and Their Use.—The chief purpose of the main records kept in business is the securing of control over the activities of the business. The control over merchandise must always be based on records. The first step in securing the necessary control is a proper departmentization of stock. Analysis of purchases and sales by departments is fundamental. In addition, a knowledge of what others in the same line are doing serves as a criterion by which to judge one’s own results. Trade associations and research bureaus are giving invaluable information by furnishing standards for judging results.

Three major problems from the buyer’s standpoint are always met. They are not independent problems but, as indicated above, are intimately related to selling and financial policies. These problems are: (1) the determination of the average stock to be carried; (2) the determination of the buying quota for a given period; and (3) the determination of the “open-to-buy” amount at a given time. Too often these matters are decided in a haphazard fashion. Only by means of a careful analysis of all the factors and the results obtained in the various departments as compared with average or standard results can a sound basis of stock control be secured.

Average Stock to be Carried.—Stock control rests, in the first place, on estimated requirements for the future. Estimates for the future must always be based on past performance, as modified by present market conditions and contemplated changes in basic merchandising policies. In estimating the amount of stock to be carried, the volume of expected sales must be taken into account. The other factor is the rate at which the merchandise should turn during the period. Thus, if estimates are made for a period of six months, the estimated sales for the period divided by the number of times the stock is expected to turn during the six months will give the average amount of stock to be kept on hand. Seasonal fluctuations must be taken cognizance of in determining the changes from average stocks to be carried at particular times during the period. Thus, if the estimated sales in a given department are $50,000 for the next six months and the merchandise turns twice during that time, manifestly a stock of $25,000, as priced at retail, must be carried. If the mark-on is 40%, the cost of the average stock will be 60% of $25,000, or $15,000, representing the average capital to be tied up in stock for that department.

The Buying Quota.—The determination of a buying quota for a given period must take cognizance of the stock on hand at the beginning of the period, the stock which it is planned to have on hand at the end of the period, and the estimated sales for the period. If, from the sum of the stock planned to be on hand at the end of the period and the sales estimate for the period is subtracted the stock on hand at the beginning of the period, the buying quota for the period is determined. This buying quota is, of course, at retail price and must be reduced by use of the mark-on percentage to a cost basis. An illustration will show the method:

The “Open-to-Buy” Estimate.—The buying quota is estimated at the beginning of the period. At various times throughout the period, if stock is to be properly controlled, it is necessary to know how much of the buying quota is available. Furthermore, because estimates made at the beginning of the period never quite coincide with the facts of actual performance, it is necessary to take cognizance of these data of performance in determining the amount of stock to be bought at a given time. The difference between the estimated sales for the period and the actual sales to date is the estimated sales to be made during the remainder of the period. If from the stock on hand at a given date is subtracted the estimated sales for the rest of the period, the difference will be the estimated stock remaining on hand at the end of the period, providing no more purchases are made. If this amount is less than the amount of stock planned to be on hand at the end of the period, the department is “open-to-buy” to the amount of the difference. If the estimated amount on hand at the end of the period is more than the planned inventory for the end of the period, no additional stock should be purchased, except of course to replenish certain stocks which have become depleted and which it is necessary to have on hand to meet the needs of customers. In calculating the stock on hand at a given time, cognizance must be taken of stock in the warehouse, in transit, and on order. A typical open-to-buy calculation is shown below:

This open-to-buy figure should be amended in the light of experience with regard to the way in which actual sales are running as compared with the estimated sales. If it is apparent that the sales are running ahead of the estimate, the sales quota should be enlarged accordingly, which will in turn increase the open-to-buy balance. A similar adjustment should be made in the event that actual sales are not keeping pace with the estimated quota.

The Stock Control Card.—The problem of stock control is not solved solely by a maintenance of buying quotas and limits. The movement of individual commodities must be watched very closely. The tying up of funds in large stocks of slow moving commodities may soon use up the buying quota needed for faster moving commodities. To maintain control over the movement of individual commodities, a record called the “stock control card,” which is similar to the stock book, is of great value in some lines. To other lines it will not be found adaptable. It is not the purpose of this chapter to attempt to lay down specific methods adaptable to all situations but only to discuss basic principles and to illustrate them by methods found applicable to certain situations. The control card illustrated in Form 43 is one used in a retail shoe store.

On the form shown as Form 43, Style, Bought From, Description, and Material, are self-explanatory. On the line below, cost is shown in the first column, size in the next, and the month with days along the rest of the line follows. Horizontally are entered on the dates shown the quantities of stock received (Rec’d), on hand (O. H.), sold (Sold), and on order (O. O.).

According to the form, on August 1 there were on hand 19 pairs of shoes, size 9, and 11 pairs of size 9½. During that week, on consecutive days, 3, 4, 3, 6, 2 pairs of size 9 shoes were sold, of which 2 pairs (circled) were returned on the 4th and 5th; and 2, 2, 1, 3, 4 pairs of size 9½ shoes were sold, of which 1 pair was returned but again sold on the 5th.

On the first day of the following week 24 pairs of each size which had been ordered on the 2d of August were received. Upon their receipt the O. O. (on order) figures were inclosed in circles. On that day also the O. H. (on hand) figure was placed in its proper place in the size 9 group. All of size 9½ had been sold during the first week of August and there was of course no figure to be entered there.

The record is continued by daily postings of sales and by a weekly posting or entering of the stock on hand. Orders are entered on the day they are placed.

With such a stock record a perpetual inventory is maintained and control over the movement of merchandise is secured.

Problems Connected with the Merchandise Inventory.—Proper accounting for merchandise at the time of inventory-taking and the close of the fiscal period requires a consideration of the following points:

Goods in Transit. It may happen that certain goods have been ordered during the period, and that the invoice has been received but that the goods themselves are still in transit. The question whether or not such goods shall be included in the inventory may be viewed from different angles, as follows:

1. If the goods have been paid for in advance, they have undoubtedly been entered on the books as a charge to Purchases. If this is the case, the goods in transit must of course be included in the inventory as if actually received.

2. If the goods are still in transit but have not been paid for, it is customary not to charge them to Purchases until they arrive. If not charged to Purchases, or other similar account, they must not be included in the inventory. However, theoretically, this method is incorrect. The fact that the goods have been ordered and are now in transit makes the business liable for their purchase price, and although not actually received, in reality they form a part of the asset merchandise. It is true that until the goods are received, inspected, and accepted, the purchaser has the privilege of refusing them if they are not as ordered, but this privilege is exercised only in exceptional cases. Generally speaking, therefore, it is better to consider such goods as a completed purchase, include them in the inventory and credit the vendor for the amount of his invoice. Instead of being charged to Purchases account, such goods may be charged to Purchase Commitments which will better indicate their status.

Goods Received but not yet Booked. In concerns where a separate shipping and receiving department is maintained, it may happen that the goods received by this department are not immediately transferred to stock or storage, in which case they may not have been taken up on the books. At the end of the period it is important to see that all such goods are properly recorded as purchased and are included in the inventory.

Goods In or Out on Consignment. Still another problem in connection with the inventory has to do with goods which do not belong to the business because they have been consigned to it for sale on account of their owner. Inward consigned goods must not be included in the inventory, if taken into stock, it is very important that they be so marked as easily to distinguish them from the regular stock.

Similarly, if goods are out on consignment to another market, they still belong to the business and must not be overlooked at inventory time. If the proper record is made at the time the goods are shipped, as will be explained in Chapter XLVIII, the memorandum accounts on the ledger will call attention to them. In some concerns all such goods are entered as sales at the time of shipment. If at the end of the period part of these consigned goods are still unsold and in the hands of agents, they should be deducted from the sales for the period and included in the inventory at full cost.

Goods for Future Delivery. Goods sold for future delivery are best handled at inventory time in the manner suggested in Chapter XLVII, even if they are set aside ready for delivery.

Goods Ready for Current Delivery. Finally, goods sold for current shipment but delayed in delivery on account of congestion in the service or for some other cause are best treated as sales and excluded from the inventory.