This is a very significant stage in developing the merchandise budget namely planning of reductions. “Retail reductions” are the difference between the merchandise item’s original retail value and its actual final sales value. This difference is the result of three major factors namely, mark-downs, discounts and shortages. “Mark downs” are the reductions in the original retail price for the purpose of stimulating the sale of merchandise. The amount of markdown can vary considerably depending on the type of merchandise and the condition under which it is sold. “Discounts” are reduction in the original retail price that are granted to store employees as special fringe benefits and to special customers in recognition of their special status say senior citizens, disadvantaged customers and religious personalities like clergy, priests, and so on. “Shortages” are the reductions in the total value of the retailer’s inventory as a result of shoplifting, pilferage and merchandise being damaged and misplaced.
There are several reasons as to why the retailer is to plan for reductions. The major one are : (1) The major purpose of the merchandise budget is to outline the retailer’s total rupee investment in the form of inventory. Therefore, any occurrences that might reduce the value of that inventory should be accounted for to give the retailer an accurate inventory investment picture (2) The merchandise budget calls for an estimate of stock levels in rupee amounts. Without reductions planning the retailer’s proposed stock levels might be inadequate to meet expected sales levels (3) Reductions planning is necessary if the retailer is to plan future operations or purchases accurately. Estimating reductions is the key input into the planned purchases formulae.
Planning reduction essentially involves making a percentage-of-sale rupee estimate for each of the three major reduction factors namely mark downs, discounts, and shortages. These percentage estimates are made on the basis of part experience of got from trade sources. To be consistent with sales and stock level planning, reduction estimates should be made in retail rupees on a monthly basis for a particular merchandise category. Having determined a monthly estimate of reductions, the retailer proceeds to plan the purchases.