Retail Accounting

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Budgeting for Retail Franchises

budgetingIn the current economic climate, it is important to focus on business planning and financial budgeting to help ensure that retailers have the net worth and liquidity to survive. John Roberts, CounterBooks MD, explains why it’s important to stay ahead of the game.

For a retail franchise, where the day to day financial decisions are taken by the franchisee, it is vital for the franchisor and franchisee to agree on a business plan annually and to draw up a budget arising out of the plan. As an independent businessman the franchisee can subsequently decide to run the business along different lines but with a plan agreed up front. The franchisor can measure the impact of those decisions and the risks they might have for the brand.

The plan will outline:
•    changes that you want to happen in the year
•    changes to your market, customers and competition
•    people issues
•    objectives and goals for the year
•    financial outcome from the plan – the budget.

Any retail franchise that doesn’t have a business plan is planning to fail. So why is it so important? Business plans help franchisees to concentrate their resources on improving revenue, minimising costs, and increasing ROI whilst at the same time ensuring a satisfactory level of liquidity to allow the business to pay its bills on time.

For most franchise retailers the key elements of the budget include:

Operating Profit

•    Category sales volumes
•    Category gross margins
•    Labour costs
•    Franchise costs
•    Other fixed costs / overheads
•    Seasonality

Cash flow projection

•    Stock levels
•    Card reimbursements
•    Vat and other tax payments
•    Other creditor terms
•    Capital expenditure
•    Retailer drawings
•    Finance facilities
•    Seasonality.

Actual results in both profit and cash terms should be compared to budget throughout the year. By these means the franchisee and franchisor should be able to capitalise on favourable trends and take action to address problem areas.

Budgeting Do’s

–    Look at historical sales trends. POS systems should provide the seasonal data. Remember, high levels of stock do not necessarily result in higher profits and may result in a cash shortage.

–     Use the budget to incorporate incentives i.e. sales promotions. For example Spar launched a ‘Fresh for Less’ promotional offer in November to help boost sales in fresh foods. Factor in the increased sales but also the impact on margin.

–    Review your budget and plan regularly. The key is being flexible, checking actual expenditure and income in comparison to budget and analyse any trends. If a major competitor opens an outlet next door it could have severe implications.

Why it’s important for franchisors:

–    Insight and predictability throughout franchise chain.
An MIS system that collects financial information in a standard format from all franchisees  will be invaluable to the franchisor in determining whether actual results are coming out in accordance with plan or whether remedial action needs to be taken.

–    Benchmarking
Compare actual performance to budget of franchisees within the network to identify good / poor performance. Obtain a consolidated view of the entire network profitability and benchmark against the competition.

–    Improved risk management
Reports for the franchisor that show the net worth and liquidity of each franchisee are vital to assess the stores at risk.

CounterBooks, a leading online retail accounting management suite, integrates with many point of sale and back office systems, reports on actual against budget and gives  retail franchisors an up to date overview of the financial status of their whole network thereby improving performance and managing risk.


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Retail Accounting 101: Retail Sales Metrics

KPIs (Key Performance Indicators) are a type of performance measure.They help you to evaluateKey Performance Indicator Chart how well your retail company is doing within a particular activity. You need to have a good understanding of what’s important to your retail company in order to choose the right set of KPIs. However there are some key KPIs that may be useful in your retail organisation:

Sales per Unit Area
Sales per unit area is a standard measure of success within retail stores. It’s often expressed in square feet but increasingly it is now being defined in square meters. It can measure your retail stores efficiency in generating revenue with the amount of space available to your retail store.  The higher the sales per unit area the better your retail store is doing at positioning products and marketing. Apple for example has twice the sales per square foot of any other US retailer.  It also allows you to benchmark your retail store against your competitors. Such information can often be obtained from trade unions, annual reports or Companies House.  Remember, factors such as location, layout and amount of inventory can have an effect on your retail stores results.
How to work out sales per unit area:

It’s a simple equation which is often expressed as follows:

£ Sales per period  e.g. £200,000 = £100 per sq ft
Sales floor area           2000 sq ft

It’s a very useful comparison tool, particularly if you have a number of different stores of varying size as it allows you to compare performance.

Sales per Customer/Transactions
You can work out the actual sales for a certain period such (month or year) and divide it by the number of customers/transactions.

For example:

Total sales               = Sales per transaction
No. of transactions

Sales per employee
This is helpful in comparing labour productivity between different retail stores.  It can also help in determining the number of sales your retail store will need to make if you take on new staff. When working out sales per employee you will need to account for anyone who is working part-time. So convert their hours to the equivalent full-time hours.

You can calculate the sales per employee as follows:

Net Sales         =   Sales per employee
No. of employees

Sales per hour tells you the speed at with each individual salesperson is selling a product to a customer within your retail store. It’s a great comparison tool to see how well each salesperson is performing in comparison to everyone else.

It’s easy to calculate:

Actual sales         = Sales per hour
Employee hours


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Retail Accounting 101: Profit and Loss Statement

What is a Profit and Loss Statement?

Retail Profit and Loss Statement

Retail Profit and Loss Statement

A Profit and Loss (P&L) statement summarises the financial performance of a business over time. It is a useful tool to assess how well your retail business is doing. Essentially you are calculating your profit or loss within a certain period.

Key elements are:

Sales – The amount of money you have made from selling your product.

Cost of Sales – The cost of making the product or providing the service before anything else is deducted.

Gross Profit – The sales less the cost of sales.

Overheads – Operating costs of the business such as travel, advertising, phone etc.

Net profit – Net profit is what you have left over after everything has been deducted. This includes overheads and taxes.

Example Profit and Loss Statement

Sales 500,000
Cost of Sales 300,000
Gross Profit 200,000
–          Salaries 5,000
–          Advertising 10,000
–          Travel 100
–          Phone 70
–          Sundries 100
Net Profit (before tax) 184,730

It is important to assess your retail performance at regular intervals however the detail required will vary between retail companies.

What are the benefits to your retail business?

–          Compare your predicted performance with your actual performance.

–          Determine growth potential within retail.

–          Assess your retail business performance with retail industry norms.

–          Forecasting

What else do think is important for a retailer when reviewing their Profit and Loss statement? Please add your comments below.

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Self Checkouts – when do they work?

Seven steps to Self Checkout heaven (or hell?)self-checkout

Most customers have probably been forced into trying them by now and love them or hate them. If you’re thinking of installing one to improve customer flow through the till area than you may want to consider the following:

1.    High flow, low value sales

In these circumstances the self checkout approach can work quite well. For example the lunch time rush hour where people are buying sandwiches and a drink. In large cities such as London it is not uncommon to see ranks of self service checkouts which are being utilised almost at full capacity from 12.00 until 14.00. The rest of the day they may be relatively unused and when installing you should consider how long it will take for a return on investment if the POS only boosts through flow for short periods of the day. You will of course have significant savings in the number of part time staff required to service customers at peak times.

2.    Credit card only

Couple this with a near field reader for low value purchases and things can really begin to speed up in the lunch hour. The down side is you will still need manned tills to handle sales to traditionalists paying cash.

3.    How many customers will walk out?

Some customers will refuse to use self service either from fear of the technology or previous bad experiences. In many cases they will dump and walk if there is a long queue at the single manned till and we all know that means you probably won’t be seeing them again, ever.

4.    Consider the demographics of your customers?

More mature customers are generally resistant to change but often spend proportionally more than their younger counterparts. If you are sited near a retirement village automation may not be the best way forward

5.    Age restricted goods

Alcohol and tobacco are the main items to consider. In the case of alcohol self checkout is possible in most countries but you will need staff on hand to quickly authorise the customer as being old enough to buy the product. As self checkout is being promoted as fast and easy any delay is annoying not just for the customer at the checkout but also those queuing behind.

Tobacco is more complicated as automatic cigarette machines are still commonly available in many countries but in others where restrictions are tighter and sales are either dark (the buyer is protected from seeing the product, for example in Ireland) or plain packaged (being introduced in Australia) the restrictions probably mean a manned tobacco kiosk will always be required.

6.    Are your bar codes clear?

Probably the biggest crime! If the scanner can’t read the bar code it’s unlikely the customer will be able to type the code in instead. This will lead to two problems:

  • They reject the item and you lose the sale of the item
  • It happens more than once and they dump the complete shop

The only way round this is to have enough staff available to help – but then reducing staffing was the reason for installing the self checkout in the first place.

7.    And the most frustrating problem….

The customer has managed to scan in twenty items with some difficulty. A member of staff has had to authorise a bottle of wine and the bar code wouldn’t read on a packet of meat. They come to pay and either the note reader or credit card reader refuses to work. Do you think they will come back tomorrow?


Working well in the right environment self checkouts will boost sales and reduce staffing costs. Get them wrong and you risk losing customers permanently. What you think, any other suggestions?

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Thinking of starting a retail business?

Have you ever thought of starting up a retail business? Whether setting up a convenience store or a car sales pitch before jumping in with both feet you need to carry out some research and cost out a business plan. It may be that you can make a 60% gross profit selling an individual fizzy drink but after all the costs associate with running a business will the business itself make any profit?

This is a list of some of the costs you need to consider when calculating if your new business will make a profit. Each retail sector is different so make sure you talk to people already working in your sector for advice.

Another tip – make sure you have some money to live on while the business is starting up. This always takes longer than you expect so be certain you can afford to pay the mortgage and feed the kids for at least a year if the business doesn’t make a profit.

After all that, and having made a guess at the level of sales, say £7 to £15 per square foot per week in a convenience store, you may decide your new idea isn’t viable. There’s no harm in finding out before starting that a business won’t work, the bigger problem is being overly optimistic and having to close after six months significantly poorer than when you started.

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Retail Accounting 101: Introduction to FIFO and LIFO

Premises, cash and stock are fundamental to retail businesses. How a business accounts for stock can have a significant effect on net income and book value and, in turn, on taxation. There are various accounting techniques in managing stock, below are the two main types of techniques:-

– FIFO stands for “first-in, first-out” – with FIFO the oldest stock items are stated as sold first. However this does not exactly mean that the actual oldest physical object has been tracked and sold; this is just an accounting technique.

– LIFO stands for “last-in, first-out” – this translates into the most recently produced items are recorded as sold first. In the USA, most companies use LIFO because it reduces their taxes in times of inflation. LIFO is only used in Japan and the USA.

The difference between the cost of a stock calculated under the FIFO and LIFO methods is called the LIFO reserve. This reserve is essentially the amount by which the tax has been deferred by when using the LIFO method.

Due to LIFO’s potential to skew inventory value, UK GAAP and IAS have effectively banned LIFO stock/inventory accounting.

Many companies will also state that they use the “lower of cost or market.” This means that if stock/inventory values were to plummet, their valuations would represent the market value (or replacement cost) instead of FIFO, LIFO or average cost.

Understanding stock calculation might seem overwhelming, but it is something you need to be aware of and if you do not, you should ask your retail accountant or retail auditor.

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Retail Accounting 101: General Retail Financial KPIs – Part 1

We have seen a vast array of key performance indicators being employed by retailers and we felt it might be appropriate to pull together this unwieldy bunch of indicators into a two part series for your perusal. The second instalment will include more customer centric indicators which often are incorporated into a balanced scorecard management system.

Retail Accounting 101: General Retail Financial KPIs – Part 1

  • Creditor Turnover – Average creditor/ (Cost of Sales / 365)
  • Debtor Turnover Days – Average debtors/ (Credit Sales/365)
  • Acid Test Ratio – (Current Assets – Stock)/Current Liabilities
  • Admin Cost % – (Administration Costs / Sales )*100
  • Average Stock – (Beginning of Period stock + End of Period stock)/2
  • Break-even (£) – Fixed Costs / Gross Margin Percentage
  • Cash Conversion Cycle – Days Stock Outstanding + Days Sales Outstanding + Days Creditor Outstanding
  • Contribution Margin – Total Sales – Variable Costs
  • Cost of Goods – Retail Price – Markup
  • Cost of Goods Sold – Beginning Stock + Purchases – Ending Stock
  • Current Ratio – Current Assets / Current Liabilities
  • Ending Inventory At Retail –  Beginning Inventory – (Sales + Transfers out + Return to Vendor + Markdowns + Employee Discounts + Shrinkage) + (Purchases + returns from Customers + Transfers In + Markups)
  • Gross Margin – Total Sales – Cost of Goods
  • Gross Margin Return On Investment –  Gross Margin £ / Average stock Cost
  • Initial Markup – (Expenses + Reductions + Profit)/(Net Sales +Reductions)
  • Interest Cost% – (Interest Costs / Sales)*100
  • Stock Turnover – Net Sales / Average Stock
  • Maintained Markup £ – (Original Retail – Reductions) – Cost of Goods Sold
  • Margin % – (Retail Price – Cost) / Retail Price
  • Markup % – Markup Amount / Retail Price
  • Net Receipts – (Purchases + Transfers in + Returns from Customers + Overages) – (Transfers Out + Return to Vendors)
  • Net Sales – Gross Sales – Returns and allowances
  • Retail Price – Cost of Goods + Markup
  • Return on Capital Invested – (Profit for the Year / Capital Employed)*100
  • Sales per Square Foot – Sales per square foot = Total Net Sales / Square foot of selling Space
  • Sales per Square metre – Sales per square metre = Total Net Sales / Square metre of selling Space
  • Stock Turnover Days – Average stock / (Cost of Sales /365) number of days
  • Total Asset Sales Ratio – Sales / Total Assets