Running a retail shop is no easy task. The word retail is a broad term encompassing everything from a grocery store with high turnover to a jewelry store with high-value items. Then there are physical and digital stores, as well as presence on e-commerce platforms and mobile application purchases. Even a small retail shop handles thousands of stock-keeping units, omnichannel sales, and various payment options, such as cash, credit cards, and online payments. Collating data from all these segments alone is a Herculean task, if done manually.

A retailer needs a robust accounting system that can track sales and expenses in real time. In this article, we will dive deep into the nitty-gritty of retail accounting and where you can begin.

The Need for Retail Accounting

A retailer faces unique business challenges, such as seasonal demand, obsolete inventory, overstocking, understocking, end-of-season sales and discounts, customer credit, and customer returns. Each of these challenges requires analyzing financial data to make informed business decisions.

Retail accounting, in its crude form, involves recording and categorizing transactions such as sales, expenses, and taxes, and analyzing financial data to make informed decisions. It is a specialized branch of accounting tailored to the unique needs of retail businesses, including real-time recording of inventory and sales and daily reconciliation of bank statements.

Real-time tracking is possible with point-of-sale (POS) and specialized accounting systems you can set up to meet your business needs. Retailers can use advanced analytics to analyze trends, such as which products sell more, which channels attract more customers, and which payment methods are most popular. They can also track loyalty points and discounts and their impact on sales, to help you focus on the right product at the right time to the right customer.

Getting Started with Retail Accounting

You can never emphasize the role of strategic inventory management more in the success of a retail store. Knowing which products to stock in what quantities, managing customer returns, and pushing sales of older stock through discounts. So why not begin your journey of retail accounting from the area where it matters the most – inventory?

Determine the Method of Valuing Inventory

A retailer must choose the inventory valuation method that best fits the nature of the goods, as this will determine the cost of goods sold (COGS) and the calculation of profits. Some common valuation methods include:

• First In, First Out (FIFO): It assumes the oldest inventory is sold first and thus includes its cost in COGS. This method is ideal for inventory with a limited shelf life, like medicines and perishable goods.
• Last In, First Out (LIFO): It assumes that the latest inventory is sold first and is ideal for inventory with rising costs, such as heavy machinery, electronics, and cars.
• Weighted Average: It takes the total cost of goods and divides it by the number of units to determine the average cost per unit. It is ideal for inventory with fluctuating prices, such as oil and gas.
• Cost Accounting: It uses the actual cost of each unit and is ideal for high-value or tailor-made goods, such as furniture, jewellery, and art pieces.
• Retail Inventory Method (RIM): This method focuses on the selling price to value the inventory. It is ideal for goods with the same prices and price fluctuations, such as groceries, apparel, and footwear. You identify the cost-to-retail ratio (cost divided by the selling price x 100) to determine the percentage of the selling price that is cost.

Suppose you buy a bag for $100 and sell it for $200, your cost-to-retail ratio is 50%. Now, you start the year with $20,000 inventory, buy another $5,000 inventory, and make sales of $50,000. Your COGS will be $50,000 x 50% = $25,000. Your ending inventory will be $0.

Many grocery retailers use this method because it is faster to compute and doesn’t require counting quantities. However, accounting for discounts can get tricky, and you will never know the actual inventory cost, making the cash amount more of an approximation. These small adjustments work out when the turnover is huge, and cash keeps flowing in and out.

Determine the Method of Accounting: Cash vs. Accrual

The accounting method depends on the nature of your retail business.

Cash accounting records transactions when cash changes hands, making it ideal for retailers who don’t keep inventory or give consumer credit. For instance, a retailer that sells fresh sandwiches, fresh fruits, and flowers doesn’t keep inventory and may use cash accounting.

Accrual accounting records revenue and expenses when the transaction is incurred, irrespective of when the cash is paid. It is ideal to get a true picture of your business, as the expense is deducted against the revenue for which it was incurred. So, if you buy inventory for $10,000 cash, it will only deduct COGS when that inventory is sold, not when cash changes.

Once you have determined the formulas and calculations, it is time to set up the accounting system and train the staff on the POS and accounting software. The software will auto-populate the data as soon as it is entered and give you real-time analysis. This may require frequent budgeting and forecasting to identify and adapt to changing trends and consumer habits.

Accounting Challenges in Retail Business

Setting up the accounting system requires professional accounting knowledge, as retailers need to address several adjustments that can snowball into costly mistakes if left unattended.

Inventory Management

Inventory management goes beyond LIFO-FIFO. Issues like overstocking, understocking, and shrinkage of certain inventory need insights into what is selling and what is not to help you make informed decisions on pricing and procurement. Knowing which inventory is shrinking or is overstocked, you can make decisions around discounts. You can also target sales strategies on overstocked products and get them out of the warehouse.

Inventory management is also about identifying which products are more profitable, fast-selling, and seasonal, and using the data to improve profitability and business growth.

Cash Flow Management

The next big challenge in retail is cash flow management. In periods of slow sales, cash may become tight because much of it is tied up in unsold inventory. However, a retail store must pay salaries, utility bills, rent, and other expenses. This requires forecasting and budgeting, cost-cutting, and alternative funding options to ensure you have a sufficient cash reserve to weather a slowdown. It will also require tight control of inventory ordering and negotiating payment terms with suppliers.

Tax Compliance

While setting up accounting systems, you need to ensure you charge the right sales tax depending on the province you are operating in. An accountant specializing in retail can help you understand your tax obligations and ensure compliance.

Contact Ford Keast LLP in London For Your Retail Accounting Needs

Retail is a high-activity business, and accounting is even more tedious. Outsourcing retail accounting can help you get skilled accountants specializing in this sector. A professional accountant streamlines the accounting process, ensures real-time tracking and timely report review to eliminate errors, and improves overall operating efficiency through inventory, cash flow, and financial management. To learn more about how Ford Keast LLP can provide you with the best retail accounting services, contact us online or call us at 519-679-9330.