A Retail business makes money by purchasing goods in large volume and selling them to retail/individual buyers at profit, i.e, sale price per unit is higher than buying price per unit, so that after paying various expenses, the business owners can have some net profit. Retail businesses usually go for low margin with high sales volume, though some luxury retailers go for the reverse with high margins and low sales volume.
Any retail business has to make three key decisions.
- Product decision — what kind of products do we want to stock?
- Pricing decision — what price do we want to sell our product/merchandise?
- Service decision — what kind of service do we want to give to customers?
A retail/department store can have the option of setting high prices for items and providing quality service, or they can become a discount store. A discount store sells items a frugal price but provide little to none customer service.
“Target” is a discount store and that’s why they are so distinguished. They provide good customer service, and high quality brand name products. Target prices are extremely competitive because they sell well known material with a nice discount.
Every retail company whether it’s wholesale or resale uses a similar accounting formula. For a retail company the management is a difficult task because the buying and then selling of goods make it an uneasy task. The accounting for a retail business compared to that of a manufacturing business are just about equal.
Cash flow management is extremely important and it requires timely matching of the company’s receivable and payable accounts. If a company is not capable of paying their bills when they are needed then that is when they will go out of business very soon. This is very true for a retail business, and the goods that are sold are known as merchandise inventory. The normal transactions that retail businesses go through is known as the operating cycle.
First, the business purchases the merchandise inventory, and pay for it on either cash or credit and second, they sell the merchandise inventory for wither cash or credit. What’s risky about a merchandising business is because the purchases are usually made on credit which means that they have to wait some time before they actually receive the money for it. However, this is not really a huge issue.
Cash flow management is extremely crucial for a retail business because they have to keep financing the inventory (goods in stock) until they are sold which can be risky. The financing period is the time from the purchase of goods for inventory, until the customers come in and purchase the products. This is also commonly referred as the cash gap. So, if it takes 50 days to sell inventory, and 60 days to collect sales for it, an the creditors payment conditions are 30 days, then the financing period is 90 days. In the financial period the company will currently be out of cash and will need to borrow money from creditors such as banks if they don’t have the funds available.
A merchandising business specialist is Claire’s Stores, Inc. They specialize in selling to teenage females and young adults. They are testing what products are selling and which ones are not. Target generally has a low financial period because they usually receive payments by cash, as opposed to credit which takes longer. The sell of goods on Visa and MasterCard are considered cash sales because they take the money right from the purchaser’s account. Generally the smaller retail stores have more sales on cash then credit, while the bigger ones sales come mostly from credit. The average merchandising store will have a combination of both. Also, cash flows is not the only concern of a merchandising business because they also take into account profitability. The reason why merchandising businesses sell goods at such a large price is so that they can have enough money left to make an income.
Profitability management is a very hard task and it includes getting a decent margin, and to maintain appropriate levels of operating expenses. Getting a decent margin will depends on the appropriate pricing of merchandise, and purchasing merchandise for a fair price. To keep the operating expenses going smoothly it depends on controlling expenses and operating everything properly. At important times throughout the year the management should compare its estimated budget to its actual one. For example, if a company has estimated that they will spend 10,000 on purchasing merchandise but actually spent $10,150 then they went over a little. However, it can be countered if they estimate that they will make $17,000 from the profit but actually ended up making $19,000. A company must also look at home their advertising is going because if they are under spending then they may not be getting the recognition that they are looking for, but if they are overspending and not getting the results they attended then they are wasting their money. They should also pay special attention to their insurance expense as well. Another important aspect of the management system is to choose the inventory system properly.
Management must choose one or two systems that will get the job done in a timely manner. There are two basic systems used in accounting for this and they are perpetual and periodic inventory system. When using the perpetual inventory system, numerous records are kept for the quantity available and the cost of the individual items as they are sold. This detailed system gives the management team a better chance of the wants or needs of customers because they have an idea what is in stock. The cost of an individual item in this system is recorded in the Merchandise Inventory account, and when the item is sold it is transferred to the Cost of Goods sold account.
However, for the periodic inventory system the item that is not sold is checked often, but usually towards the end of an accounting period. No records are kept for the inventory throughout the accounting period. The inventory is only accurate for the balance sheet date. The reason why some retail stores use this method is because it cuts down on the clerical work. This method is acceptable for small business, but I’m not sure it will work too well for large businesses.
Generally companies that sell items in bulk or high quantity but low quality such as discount retail stores will favor the periodic inventory system. On the other hand, companies that sell high priced, high quality but low quantity items such as jewelry stores will tend to use the perpetual inventory system.
The main transactions of any retail businesses come from buying and selling. The key business operating metrics for a retail business are: Fixed Assets, Working Capital, Inventory, Inventory Turnover, Accounts Receivable, Accounts Payable
A retail business is extremely vulnerable to theft and fraud — it is not uncommon to have 1-2% inventory loss due to theft, which significantly impacts profit margins.
The reason for this is its quite easy to that the cash and inventories are easy to steal and its difficult for a large company to keep track of all of the transactions that goes on each day. So, that’s why it’s extremely critical for a merchandising business to take the precautions to protect their assets which is commonly referred as internal controls. To maintain control of the inventory, it is required in both systems to take a physical inventory. This is a physical count of the merchandise that is currently available. This can get tricky at times because humans can miscount, so accuracy is very crucial during this process. The merchandise inventory is all of the goods that will be sold in the future. These include all goods whether in boxes on the shelf or currently on the self. The ending inventory is inventory that cannot be sold, or are not intended to be sold. These include merchandise that has been damaged, but it’s a good idea to sell the damaged goods at a significantly reduced price if they can to get rid of it. The count for the business is usually taken at the end of the fiscal year or when the business will significantly slow down such as in January or February. However, they will generally do this when their store are closed, or sometimes on the weekends. It’s very common for companies to experience loss of merchandise from their own employees.
When using the periodic system there is no way of finding out how this happened because the loss of merchandise is automatically included in the cost of goods sold. For example, if a company lost $2,000 during an accounting period then that will automatically included in the cost of goods sold. However, with the perpetual system this makes it a lot easier to identify losses because the merchandise inventory account is constantly updated with sales, and returns of goods. Once the amount of loss is calculated the merchandise inventory account will be updated.
To learn more, and see the above retail business management lessons in action, visit the websites and stores of any leading department stores like Wal-Mart http://www.walmart.com/ or Target http://www.target.com/