You probably have heard of the term “markup” before. However, have you ever met the phrase “markdown”? In accounting, people would use this term to describe a reduction in the value and price of a particular asset (Also see Guide to Deferred Tax Asset). Markdown is a way for business owners to increase their sales. Thus, it will typically happen when business owners are unable to sell certain products or services at their current prices.
Before knowing whether they should adjust the prices, business owners should first know the sales of the products and services they provide. They need to monitor the volume of sales constantly and know how much they have spent compared to the amount that they have earned. However, they will not be able to know these without the help of the profit and loss statement that requires accurate and up to date accounting (Also see Comparing Computerised Accounting and Manual Accounting) records to be generated. Yet, not every business owner know how to deal with these accounting-related reports and complicated figures. If you are facing the same problem, do not hesitate to hire an in-house accountant or an accounting firm in Singapore.
As we mentioned above, markdown is a reduction in value and price. By doing so, that product or service will be able to attract more customers. Although the markdown will make that item to have a lower profit margin, this will cause the overall sales revenues to be higher because the number of units sold increases.
Business owners should value the products and services they want to sell accurately before they set a price for them. If the price is too high, those products and services are less likely to attract customers, hence having a low sales volume. However, on the flip side, the company will not be able to earn a profit (Also see The Relationship Between Net Profit and Operating Profit) is the product or service are sold at a low price.
Some people may feel confused between markdown and sales discounts are both involve price reduction. However, keep in mind that a markdown reflects the value, but a sales discount does not. A markdown is an adjustment made to the price of a good or service to show a drop in the market value. On the other hand, sales discounts are not related to the valuation of that good or service. They are the reduced rates the businesses (Also see Identifying the Profitability of a Business) offer to their customers for specific reasons.
As a markdown serves to adjust the product price to a price that the consumers are willing to pay, it is a devaluation of that product. If business owners have made the first markdown, but the sales still do not increase, they may need to markdown the price again until they can sell the product at a profitable price and at the same time attract customer to purchase them. Note that they should not markdown the prices too aggressively in a short time. Business owners need to leave some gaps between the time of markdowns for them to observe the impact of new prices in the market.