Have you ever secretly dreaded that someone would find out you don’t know everything you’re supposed to about running your retail business?
A client was in our offices recently, discussing the quarterly results of his business. The client was thrilled to see black ink at the bottom of his income statement, and he casually remarked, “Guess we’ll finally be able to pay out some bonuses.”
But cash is not the same as profit. If our client had a better understanding of the difference between cash and profits, as well as a better understanding of items like current liabilities and notes payable, he would see that although he showed a profit, his bonus checks might bounce.
Understanding the financial limits of your store — and realizing the company’s full potential — must begin with a good understanding of basic retail terminology. For many of us, it’s like learning another language, the language of retail business.
These “language lessons” will be simple, straightforward and to the point.
The retailers in this article are fictitious, but you may recognize many of the situations described. We encourage you to save this set of definitions, perhaps passing them on to others in your store. And, as with any good learning experience, make an effort to apply your new understanding of these terms every time you come across them.
A liability to a creditor or what is owed to someone. Accounts payable usually consist of open accounts with vendors — what is still owed for purchases of goods and services.
Example: Irving Surviving went to pick up the “I. M. Surviving Company” T-shirts he ordered for his sales contest. When he got to the local T-shirt shop, he discovered he had forgotten to bring a company check. “No problem,” the shop owner said. “Here’s the bill; just stick a check in the mail.” I. M. Surviving Company just acquired an “account payable” to the T-shirt shop.
An amount due to your company, usually for sale of goods or services. Accounts receivables generally don’t include deposits paid that may be refunded or accruals of other types. For example, if a company has consistently overpaid on its payroll tax, this does not become an account receivable. Credit granted to customers for purchase of merchandise does create an account receivable.
Example: The T-shirt shop in the previous example now has an “account receivable” from I. M. Surviving Company. The T-shirt shop will be receiving money from Irving Surviving (if all goes well).
Accrual basis of accounting
This method of accounting reports revenue (sales) and expenses on an income statement for the period in which they are earned or incurred, regardless of when the cash actually is received in or paid out.
Example: John runs his business the best way he knows how. For John, that means counting his eggs as soon as the chicken lays them, whether or not he has actually seen the hatched chicks. In other words, John counts his money as soon as a sale is rung up. If he does this, however, the law also requires that John count his expenses as they are incurred, even if he has not paid for them yet. John’s sales and expenses are calculated on an accrual basis of accounting.
An expense that has been incurred (for which a business is obligated) but has not yet been paid.
Example: Francis gives her full-time employees two weeks annual paid vacation. Only one employee has not used up his vacation benefit for the year. Francis knows that although she has not yet paid out the vacation to the remaining employee, it is an accrued expense on her books.
Officers’ salaries, wages and benefits, professional fees, office supplies, vehicles and all other general and administrative expenses (sometimes called G&A expenses).
Example: Joseph’s banker has given him two specific directives in order to expand his line of credit: reduce his inventory and cut his administrative expenses. Joseph knew how to fix his inventory, but he groaned to think of cutting his administrative expenses, which included a recent proposal to increase wages and benefits and to use an outside bookkeeping service.
Allowance for bad debt
An estimate of uncollectible (for whatever reason) accounts receivable, entered on the balance sheet to help determine the true value of money owned to the company.
Example: Henry reviewed his accounts receivable aging reports for the last six months, mentally estimating what percentage of his accounts were long overdue. He then applied that rough percentage to his current accounts receivable to arrive at an allowance for bad debt.
Any physical object (tangible asset) or right in something (intangible asset) with a monetary value that is owned by a company. Assets are grouped and listed on the balance sheet and are usually shown at their total cost or at cost less depreciation for wear and tear.
Example: Penny had just bought a brand new personal computer and notified her bookkeeping office that she would be placing the new asset into service immediately.
This is the basic statement of a company’s financial position, showing at one particular moment in time the value of its assets, the amount of liabilities and the total ownership equity in the business. The balance sheet is structured around the formula: Assets equal liabilities plus net worth. Analysis of the various parts of a balance sheet (and comparison to historical and industry balance sheets) can yield valuable information on a company’s strengths, weaknesses and potential problem areas.
Example: Joan squirmed in her seat as the loan officer scrutinized her balance sheet. After what seemed like an interminable length of time, the banker set the paper on the desk and said, “Looks good, Joan. You’ve certainly improved the strength of your company since last quarter. I think we can help you this time.” Joan breathed a sigh of relief; carefully monitoring her assets and liabilities had paid off.
Example: Around the middle of the month, Matthew had been told in no uncertain terms that his B.O.M. inventory was to be at minimum levels. When his boss made another reference to it, saying, “How are you doing on your inventory? I want it fixed by the first day of the month,” Matthew held a hasty sale.
Cash basis of accounting
This method of accounting records revenue (sales) as it is collected and expenses only as they are paid. Note: You may use either the accrual basis or cash basis of accounting to run your business, but never parts of both.
Example: Mary likes to run a simple business. No accounts payable, no accounts receivable. “Cash in” is revenue; “cash out” is expense. Mary prefers to use the cash basis of accounting.
A statement of cash in (receipts) and cash out (disbursements) over any particular length of time. A cash-flow statement can be done for a week or a year, on a scratch pad or a computer spreadsheet. The cash-flow statement provides critical information that will help people make better business decisions.
Example: Joanne knows she’s had an increase in sales for the last two months, her margins are high and her inventory is in line. So why can’t the company stay current with its suppliers? Joanne’s plight is common to many businesses — she needs to do a little cash-flow planning. To help manage her company, Joanne should plot out a cash-flow statement, including when the money from her receivables and other sales is expected in, and when the money for suppliers and other expenses is due to go out.
Cost of sales
Also known as cost of goods sold (COGS), gross cost of merchandise sold, total merchandise costs, etc., this is your beginning-of-the-month inventory, plus purchases at cost, minus the end-of-month inventory at cost. It may or may not be net of cash discounts, freight, workroom costs, etc. The cost of sales is subtracted from sales (at retail) to arrive at a key number for your business: gross margin.
Example: Chris recently purchased a few items from a supplier for a trial run. He had never stocked this item before, but was delighted to see a favorable response to it. At the end of May, its inventory was $500. He decided to purchase $3,000 more of the new item and held a special sale the following month. At the end of June, the original inventory was down to $650, so the company’s cost of sales for the month of June was $2,850.
Current portion of long-term debt
The portion of overall long-term money owed that is due within one year of the date of a balance sheet.
Example: Fran recently entered into a three-year lease/purchase agreement for a new computer. On her balance sheet, she placed the current portion of the debt (the first year’s payments) under current liabilities and placed the remainder under long-term liabilities.
Patricia M. Johnson and Richard F. Outcalt are nationally recognized retail strategists and co-founders of The Retail Owners Institute. They launched the WIP, an inventory management resource specifically for cannabis retailers, which can be accessed at CannabisRetailBiz.com. Johnson and Outcalt can be reached at 206-623-3973. They will also be speaking at Marijuana Venture’s Retail and Dispensary Expo in Portland, Oregon on Oct. 23-24. For more information or to register, visit www.TheRADExpo.com or call 425-656-3621.