This is Part 1 in our Merchandising Operations series in which we're going
to be discussing the operating cycle, inventory, and purchase discount terms. So
the first thing we'll look at is the Operating Cycle of a Merchandising
Company. Step 1 is we have to get cash into the business somehow or another.
There's a couple ways this can happen. If you're a new business, a startup business
then you can get investments by the owners. So the owners can invest cash for
stock, and therefore you have cash. Or if you are a business that has been
generating revenues in the past, then you can collect on those sales to get cash.
And with that cash you will purchase inventory, and of course you purchase
inventory to resale. So Step 3 would be to sell the inventory. There's a
couple of ways you can sale inventory. One, you can sell inventory for cash. The
other, you can sell inventory on account. If you sell inventory inventory for cash,
you would skip the Step 4 in this cycle, and go directly to back to Step
1. However, let's assume we sold the inventory on account. So if we sold
inventory on account, we need to eventually collect on that sale to give
us our cash, and that starts our cycle all over again. Now let's look at
inventory systems. There are two that we'll look at. The first one is a
Periodic Inventory System. It's very much like it sounds, it's when you take a
periodic inventory. Some of you listening to this may have
worked in a business or a company where you've had to stay there overnight, and
you had to take inventory. That would be a periodic count of your inventory. So
companies that sell relatively inexpensive goods, or small levels of
inventory may find a periodic inventory system to be the most cost effective. And
companies that do not have the technology for a perpetual system would
probably find it more beneficial to do a periodic system as well. So again it's
when you have an initial count of your inventory, you make sales of your
inventory, and then later you go and count what you have left.
That's a periodic inventory system, you make a periodic count of your inventory
on hand. The other type of inventory system is called Perpetual. This is where
we have a running record of all inventory and cost of goods sold. So each
time a sell is made, it is taken out of inventory, and the cost is
recorded. So for example, if you've ever been to a large department store, like a
Target or a Walmart, and you they slide the the items that you're buying across
that scanner and it beeps. Every time it beeps, it's immediately taken out of the
inventory and the cost is recorded.
Now let's look at Purchase Discounts. Purchase Discounts is a deduction from
the invoice price that's granted to encourage early payment of an amount due.
And we can have several terms here, it can be many different types of terms.
We're going to look at three different different ones here, and again it could
be any form. So please be aware of that. Let's say we had 2/10, n / 30. Now
in accounting terminology, the way we would say this is 2/10 net 30. That's
what we would read that. What this means is we're going to get a 2%
discount if it's paid within 10 days. If it's not paid within 10 days, the net is
due in 30 days.
That's what 2/10 net 30 would mean. And again it can be any form. You could have
1/10 net 45. That would be a 1% discount in 10 days or the net is due in
45 days. So any form. How about net 30?
Well there's no discount here for early payment, and the net is due in 30 days. It
could be net 45, net 60, whatever the terms of the business are. And one more
we'll look at is E.O.M. This simply stands for end of month. This means your payment
is due at the end of the month.