Accountancy In Business Explained
It has been amazing to me how frequently accounting practices and procedures have been in the news over the last few years
. The pressure to produce consistent earnings and the advent of complicated financial transactions has led many companies to "cook the books" with an array of sophisticated transactions and structures. Fortunately, multi-unit retail companies do not face these complicated issues. For the chain manager the most important accounting process is not financial but operational. Financial accounting is concerned with Generally Accepted Accounting Principles (GAAP) and reporting outside the company to lenders and shareholders. Operational accounting is concerned with tracking profitability and return on investment for the key business units and products of the business. The key principles of operational accounting are not complicated. Let's review some of the important concepts.Use weekly accounting periods. For multi-unit retail businesses weekly accounting is almost universally accepted for reporting sales results. For reasons I will never understand, some companies insist on using calendar month accounting for reporting operational results.
Calendar month accounting only complicates and confuses the accounting process with no benefit to decision making. Better operational accounting processes are based on four-week accounting periods. The accounting year will consist of 13 periods of four weeks each.
Alternatively, some retail companies use a quarterly reporting system consisting of 13 weeks. I also favor weekly reporting of variable margins. For this purpose I define variable margin as "net sales less cost of goods sold and hourly labor." Weekly variable margins are a key metric for any retail business and monitoring this key statistic is an excellent way to get an early snapshot of period profitability. Some companies try to construct a full profit and loss statement weekly and make the process entirely too complicated and expensive to maintain. Once the variable margin has been calculated, it is not difficult to apply a weekly fixed cost charge to estimate weekly net cash flow for each location.
Track profitability and cash flow by location. Here again, "four-wall" cash flow is a universally accepted concept. A retail chain cannot be effectively managed without knowing the profitability of each location. However, some companies adopt accounting practices that mask the true profitability of each business unit by creatively allocating overhead, marketing and other costs to the store level to the point that it is not possible to determine the store's stand-alone profitability. One recent client paid store-level management salaries and training costs through its separate management company and then allocated management costs among stores based on net sales. For them, it was too much work to track where each manager worked since they moved managers so often. The system was simple, but it did not lead to accurate reporting of individual-store results.
Hold general managers accountable for weekly variable margin results. In the world of accounting there is always a tradeoff between timeliness and accuracy. Given enough time, period accounting results can be presented accurately. If you wait a year or so to publish the latest period results, profitability will be accurate because you will have very few cost estimates. In my view, every effort should be made to report the most accurate weekly variable margin results as quickly as possible and hold managers accountable for those results.
Net sales are the sales that are rung up through the POS system. Knowing gross sales is good only in theory since net sales are the amounts deposited in a bank account. Cost of sales can be measured based on the product mix sold. In the restaurant business, inventory should be taken weekly so food costs can be determined accurately. If inventories cannot be taken each week, the "perfect food cost" should be used based on the mix of products sold and an allowance for waste added on based on historical averages. Hourly labor can be estimated based on hours worked. Those hours can then be multiplied by the average hourly wage to determine the total hourly labor cost. An even better approach is to pay hourly employees on a weekly basis. Employees will like this approach and the cost of variable labor by store can be known precisely. A flash report of variable margins by location published within a day or two after the close of the accounting week is a very effective tool in managing your business.
Retail accounting is not complex. You don't need a CPA trained in the arcane rules of GAAP to get useable variable margins by location every week. You just need to set up systems to capture the proper information weekly, the discipline to review the numbers carefully and the will to hold managers accountable for the results.
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