We train consultants nationally and recently this article was published on Intuit's firm of the future web site, but thought there was value for the general public
With more than 500,000 U.S. small retailers employing less than 20 people, the one thing we at English Management Solutions have found in our almost 20 years in business is that retailers need our help. Most go into business because they have a passion for their product and customers, but managing the numbers is the last thing on their minds. However, most small retailers don’t fail due to merchandising issues or poor customer experiences; they fail because they were unable to manage cash flow.
Helping your clients understand how cash flow affects their businesses creates a huge opportunity for accounting professionals to provide advisory services, especially when it comes to creating an advisory workflow.
The most critical component of cash flow is understanding inventory. Retailers live and die on managing their inventory, so when we first consult with a new client, we try to understand their current systems. How do they track their inventory? What point-of-sale system do they use? What reports are available to them from their system?
In a perfect world, the retailer would have the exact item the customer is looking for at the exact time they want it, but in the real world, retailers need to carry inventory to ensure they can make the sale. That being said, overbuying inventory is a major problem we see with a number of struggling retailers.
A best practice approach is to help them to create a “buying plan.” Every retailer should understand the open-to-buy (OTB) formula, the key to an effective buying plan. The amount is derived from taking projected sales in retail dollars, adding any planned markdowns, adding planned month-end inventory and subtracting the inventory on hand at the beginning of the month.
That’s a lot of words, so let’s see it in action. Assume planned sales are $45,000 and the client plans for $500 in markdowns. They expect to have an inventory at the end of the month of $125,000, and the beginning inventory is $120,000. Doing the math, they would have $50,500 on retail dollars to spend on merchandise.
There is one more step to find out how much they can spend on inventory. Since you are dealing in retail dollars, you need to multiply by the markup percentage. In this case, it is 60 percent, or $30,300 to spend on inventory. In our practice, we find it best to do an OTB by department, remain realistic and check to see if our projections were accurate.
Developing strategies to deal with discounts is another area of operations you can help retailers understand. Once a retailer buys the inventory, they grow attached to it.
We tell our clients to picture dollar bills sitting on the shelves; inventory is the largest investment for retailers, but we tell them not to get too invested in it. Discount strategies can be a whole article in itself, but I will relay one story to illustrate the point.
I have a client in San Diego – a women’s boutique. During the fall, they carry sweaters. I was helping the client do inventory, and there were several bins with sweaters. The tags were yellow; when I reviewed the receiving records, the sweaters were at least three years old. Think about the time it took the retailer to display the sweaters, only to take them down and pack them away after season. The following year, they repeated the same routine. A better approach would have been to sell the sweaters for whatever price they could get in the first year, then invest in inventory that could move much more quickly.
Consider the Retail Niche
Retail is a rewarding industry niche that needs lots of help from accountants, especially when it comes to advisory services. While it’s hard to cover all of the best practices in this article, I encourage you to learn the language, position yourself as a subject matter expert and grow your practice with retail clients.