Accounting for Retail Business
Accounting for a retail business is hardly the only challenge independent retail business owners face. Investing your time and energy into a business that is faced with competition not only from other local businesses, but also national franchises and online businesses can sometimes seem like a losing proposition. But the satisfaction of doing what you love, developing a niche market, building a loyal customer base, and providing excellent customer service can make it all worthwhile.
To help you succeed, it’s important for you to stay informed and work with qualified professionals, who will let you stay focused on your business goals and provide you with the insights you need to succeed in a competitive market. Finding the right accounting partner for your retail business can be one of the most vital business relationships that you establish. Retail businesses have many special considerations that require experienced and knowledgeable guidance to ensure that you are making the wisest decisions for both the short and long-term success of your store. Chief among them:
- Cash Management: Retailers typically receive cash, checks, credit card and other electronic forms of payment, and must ensure that everything is properly recorded and reconciled. They also need to manage cash flow to ensure they have enough cash on hand to pay bills and meet their financial obligations such as purchasing inventory and investing in their business. Cash flow can be unpredictable, particularly for seasonal or niche retailers.
- Sales and Returns: Retailers must account for sales and returns in their financial statements, including tracking revenue and associated costs of goods sold, tracking returns and allowances, and properly accounting for any discounts or promotions.
- Sales Tax: Retailers may need to collect and remit sales tax, depending on where and what they’re selling. Sales tax rules can be complex and retailers must stay up-to-date on any changes to sales tax laws and regulations.
- Financial Reporting & Debt Covenants: Retailers may have complex financial reporting requirements due to debt covenants that fund their inventory and operations, including preparing financial statements that accurately reflect their financial position and performance, and complying with any regulatory reporting requirements.
- Inventory Management: Retailers must carefully manage their inventory to ensure they have enough stock to meet demand while minimizing the costs associated with holding excess inventory. Accurate inventory tracking is critical for determining the cost of goods sold and properly valuing inventory for tax purposes.
Let’s dig even deeper on inventory given its importance to retail businesses.
Inventory Management for Retail Businesses
Making sure you have enough inventory on hand, but not too much, is the first challenge of inventory management. The second challenge is how to account for that merchandise. Effective inventory management can help reduce costs, minimize waste, and improve profitability. Ineffective management brings with it a whole host of problems. There are multiple accounting methods that retailers can use to account for inventory.
- First-In, First-Out (FIFO): Under the FIFO method, the first inventory items purchased or manufactured are assumed to be the first items sold. The cost of goods sold is based on the cost of the oldest inventory items, while the ending inventory value is based on the cost of the most recently purchased or manufactured items.
- Last-In, First-Out (LIFO): Under the LIFO method, the most recently purchased or manufactured inventory items are assumed to be the first items sold. The cost of goods sold is based on the cost of the most recent inventory items, while the ending inventory value is based on the cost of the oldest items.
- Average Cost: Under the average cost method, the cost of goods sold and ending inventory value are based on the average cost of all inventory items. This method can be particularly useful for retailers with large quantities of similar inventory items.
- Specific Identification: Under the specific identification method, the cost of goods sold and ending inventory value are based on the actual cost of each inventory item sold or remaining in inventory. This method is typically only used for high-value or unique items, as it can be time-consuming and expensive to track the cost of each individual item.
To understand which approach makes the most sense for your business, you should contact a qualified accountant with experience working with retailers. They can help you not only identify which accounting method will serve you best, but also help you set up the systems and processes to help manage the task throughout the year.
Accounting for Retail Businesses with Haworth & Company
Haworth & Company has decades of experience helping retail businesses in the greater Minneapolis/St. Paul area establish the best processes for managing inventory, cash flow and more. Contact us today to discuss how we can help you to simplify your accounting and improve your business performance.
