Some business owners are still attached to the outdated belief that accounting processes are of little benefit apart from facilitating regulatory compliance. But these days, having a financial system underpinned by sound retail accounting practices can bolster the adaptability of your retail business to evolving trading conditions. It can boost efficiency and give you more time to develop your business too.
So what are the retail accounting basics you should adopt for an effective process? Here are five suggestions.
1. Gather information with retail sales accounting software
Today’s retail sales accounting software doesn’t just track money coming in and going out. Leading products like Xero can connect to hundreds of apps, and this allows you to streamline processes around collecting receipts, managing inventory, recording staff attendance, accepting online payments, and so on.
Since you can run your business while accounting for retail transactions with retail sales accounting software, you’ve basically got a one-stop-shop to collect all kinds of useful accounting and business data. From payroll to taxes and sales to customer complaints, you can easily get the information you need to assess business performance and stay compliant with tax requirements.
From an accuracy perspective, the inter-connectedness of these apps takes away the need to manually update multiple databases, and this reduces the chance of human errors while saving valuable time.
2. Use data to make managerial decisions
The second step of our retail accounting basics journey is to use data to inform your decisions. You can unlock the full potential of your accounting and business data by running and analysing retail management accounting reports.
When sales, inventory, income and expense reports are reviewed regularly, you’ll be able to figure out what is – and isn’t – working in your business. In particular, you’ll find out:
- Whether promotions are bringing in more customers
- How discount offers are affecting sales margins
- How actual inventory and other costs compare to budgeted amounts
- Which products are fast or slow moving
- What product is driving your income
Not only will this kind of information help to improve your sales and marketing strategy, it’ll also alert you to potential problems on the horizon so you can address them early on. The following are examples of what you could look out for:
- Rising inventory costs
- Shrinking margins
- Mismatch between inventory on hand and customer demand
- Insufficient cash flow to meet future obligations
3. Keep and eye on accounting issues in retail industry
It’s important to be aware of accounting issues in the retail industry as well. You’ll need to bear them in mind when preparing your business accounts and understand how they affect your business.
Some issues have a critical impact on financial statements. For example, retail inventory accounting has been thrown into the spotlight following the COVID-19 pandemic. This is especially relevant for retailers with a physical shopfront, as the closure of shops during lockdowns could arguably render some inventory obsolete. Sales of stock that depend on seasonal trends or have a limited shelf life are particularly affected by this. Avoiding stock wastage is one of the key basics of retail accounting.
Other accounting issues in the retail industry that have emerged from the pandemic include:
- accounting for rent concessions,
- assumptions around cash flow forecasting,
- the impairment of intangibles,
- fixed assets
- the right to use leased assets.
Remember, the strength of your financial statements can significantly impact your ability to borrow or refinance. You could also breach financial debt covenants that require you to maintain a minimum interest coverage ratio, cash flow level or earnings before interest and tax.
4. Follow accounting policies consistently
You should monitor whether you’re applying accounting policies consistently. If you do so you’re well on your way to employing good retail accounting practices.
Accounting policies are the ways you go about complying with accounting rules. These matter because they affect the bottom line you report.
We’ll use an example to illustrate.
Amongst the key accounting policies retail industry has, inventory valuation is arguably the most critical.
Businesses can choose to value their inventory using an average cost method.
Or they can assume that they sell their oldest stock first. This is known as the “first in, first out” (FIFO) inventory valuation method.
Since the method you choose will impact the closing stock value on your balance sheet and the cost of goods sold (and therefore your net profit) on your income statement, you’ll want to choose the method or policy that represents a fair picture of what’s going on in your business.
Apart from inventory valuation, other policies that tend to be relevant to retail businesses include:
- depreciation,
- valuation of fixed assets,
- translation of foreign currency items,
- treatment of leases
Remember, it’s useful to measure, disclose and account for items or events in a similar way because this enables you to compare business performance across different time periods.
5. Hire Professionals
While the latest retail accounting software can process everyday records, you’ll need to hire a bookkeeper or an accountant for retail if you’re finding it hard to keep up with the volume or complexity of your business transactions. Maintaining accurate and up to date records is our 5th retail accounting practices recommendation, and one of the most important.
Bookkeepers commonly maintain your books and help with tax compliance by working out your GST position and lodge BAS statements. They perform bank reconciliations, raise invoices, and follow up with debtors. They can also pay bills from creditors, calculate payroll and summarise retail accounting journal entries at month-end. For those with a growing business, these services can be a lifeline to free up time and energy.
POP Professionals can help you
Accountants such as POP Business offer bookkeeping in addition to other value adding services. Our POP experts can help with:
- Setting up your financial system. This may involve designing and implementing an effective record keeping system and connecting your business to the cloud.
- Preparing cash flow forecasts. If you know how much money is flowing in and out, then you can prepare for upcoming cash flow needs. Whether that means change prices or reducing costs, you will be prepared in advance.
- Creating budgets. Having reasonable revenue and expense targets offers a roadmap to achieve financial and business goals. Budgeting also allows you to allocate resources to meet growth plans while managing debts.
- Offering industry insights. By keeping you on the pulse with industry changes and trading conditions, you can stay one step ahead of your competitors.
- Securing finance. If you need to borrow or refinance, having a realistic business plan in place. You can also hire a professional to pitch your application could improve your chance of getting a loan.
- Managing growth. Modelling costs and cash flows allows you to prepare for rising costs that will need to be paid ahead of receiving money from increased sales.
To achieve better performance, lean on the tools and data from your accounting process. As long as you combine sound retail accounting practices with streamlined business processes, you’ll have accurate information readily available at your fingertips for fast and superior business decisions.
We hope you’ve enjoyed our guide on the 5 retail accounting basics and hope you can use them for business success. If you would like help with your bookkeeping, payroll, company tax or other business accounting services, get in touch at 1300 180 630 or via the link below!
