📈 Best Accounting Practices for Retail Business in 2024: Stay Ahead! 💼

Introduction:

Effective and efficient accounting procedures guarantee adherence to legal requirements and offer vital information about a company's financial health. Whether you run a large corporation or a small startup, following best practices in business accounting can help you manage resources sensibly, make well-informed decisions, and increase long-term profitability. Adopting these practices can address common accounting issues, improve financial transparency, and help businesses make well-informed decisions that spur growth and profitability. This will help businesses overcome these obstacles and achieve financial excellence.

What is Retail Accounting?

Retail accounting is a special type of inventory valuation that is widely used by retailers. Because of this, it is more of an inventory management technique than an accounting technique, which makes the term "retail accounting" a little misleading. Instead of manually calculating the value of your inventory, you estimate it in retail accounting. Additionally, you assume that all units of the same item will have the same prices, price changes, and rate of change.

Managing Inventory Costs with Retail Accounting

The ten fundamental steps in retail inventory management include checking the products you own, their location, their quantity, and other details like expiration date. Understanding demand, costs, and other factors can help you maximize profits with the help of this stock data.

1. Create a Centralized Record of All Products:

Put all of your products on one list and include the following information:

Product name

Stock-keeping unit (SKU)

Brand

variables including product category, lot number, location, size, retail price, and expiration date.

Vendor and vendor SKU

Wholesale cost

Minimum reorder amount

Economic order quantity (EOQ)

Case quantity amount

Inventory on hand

Reorder lead time

To aid employees in product identification, include product descriptions and images. If you are an online retailer, this step is crucial. Update your inventory record whenever you add new products. Update the information whenever something changes, like a vendor or wholesale price. Establish guidelines for entering inventory, stating who is in charge and when. 

2. Identify Stock Location:

It is simple to keep track of the location of your inventory if you run a small business with just one store. Items are most likely in the stockroom or on display. However, inventory may be kept in stockrooms, warehouses, distribution centers, transit, and on store shelves by retail chains with numerous locations and omnichannel sellers. Specific places like sections, shelves, and racks are found within those destinations. 

3. Do Regular and Accurate Stock Counts:

To make sure your inventory is accurate, you must count it on a regular basis. To prevent mistakes, account for shrinkage, damage, defects, and returns. This process is made simpler by a retail inventory management system, as you do not have to start from scratch and only need to double-check your data.

4. Combine Sales Data with Inventory Data to Simplify Reporting:

Sales and inventory data can be integrated using a retail inventory management system. This image displays the products that are outpacing and underperforming in terms of sales velocity. To determine when and how much to reorder, as well as when to offer promotions or discounts, use the product data.

5. Create a Purchasing Process:

Set aside time to go over data and place orders; this will help you avoid falling behind seasonal trends or running the risk of stock outages. You can set stock levels for specific products with an electronic system to receive reorder alerts. A buffer that permits sales to remain at typical levels should be included in these levels.

6. Establish a Process for Markdowns and Promotions:

There are a number of reasons why product sales might fall short of projections, including seasonal variations, obsolescence, and cooling trends. If you provide markdowns, be strict about how much you discount and move slow sellers so that you can make money and create space for more lucrative items.

7. Create a Stock Receiving Procedure:

You will check incoming orders and precisely enter the goods into an inventory system during the receiving process. Any supplier error or damage sustained during transit could lead to issues such as unanticipated stock outages, vendor overpayments, and dead stock if there is no established protocol in place.

8. Create a Procedure for Returns:

You run a higher risk of holding onto unsaleable stock or missing the chance to rehang a sellable item from the display if you do not have an inventory management procedure in place for managing customer returns. Examine the returned item to determine whether it is broken or defective before sending it to the vendor for repair, write-off, or return, if necessary.

9. Determine a Dead Stock Procedure:

Overstock burdens profitability and uses up capital. Erroneous deliveries, broken goods, and unsold seasonal merchandise are examples of dead stock. Items that fit this description should first be noted and taken out of stock. Assign a location for the storage of dead stock, and manage it on a regular basis (weekly, monthly, or according to a schedule that works best for your company). 

10. Pick Your Inventory KPIs:

Select and monitor a few key performance indicators to determine the process's effectiveness (KPIs). For retailers, key performance indicators include profitability, inventory value, sell-through rate, and turnover rate. See examples and discover how to calculate them in the comprehensive guide to inventory management KPIs.

Ways To Calculate The Cost Of Your Inventory

The components that a business counts as inventory determine this cost. Once you have chosen which elements to include, you can compute this value. These four actions will assist you in doing so:

1. Determine your method

Decide how to allocate the cost of your inventory first. The specific identification or weighted average method is effective in the majority of cases. Alternatively, you could employ the last-in-first-out (LIFO) or first-in-first-out (FIFO) strategies.

Example: Wavewood Socks chooses to employ the weighted average approach. The best approach is to find the average cost and apply it to each individual product, since the company only sells socks. For the purpose of computation, each pair of socks costs ₹105.

2. Count your inventory

Depending on how you ship, store, and track your products, this process may take a while. Once you have an idea of how much merchandise you have, multiply that figure by the first step's individual inventory cost.

Example: Wavewood Socks carries 15,490 distinct items in its inventory. The cost of the merchandise is ₹16,26,450, which is calculated by multiplying 15,490 by ₹105.

3. Evaluate your related costs

Determine how much you wish to include in the categories for ordering, holding, and administrative expenses. It could be important, depending on what you decide to put in.

Example: The payroll for Wavewood Socks' office staff and the holding costs for keeping the socks in a warehouse are included. It also adds ₹1,00,000 to the affiliated ones' bulk wool and cotton ordering costs.

4. Combine your costs

To the overall cost of the socks, add the associated costs. This gives you your overall cost of inventory.

Example: Wavewood Socks has ₹1,00,000 in additional costs in addition to ₹16,26,450 in merchandise. The company's total inventory cost is ₹17,26,450.

Cost Accounting vs Retail Accounting

The two approaches to managing financial information—cost accounting and retail accounting—have different goals and work processes. The two are contrasted as follows:

Cost Accounting:

Focus: The main goals of cost accounting are to analyze and manage expenses related to production, manufacturing processes, and internal business operations.

Goal: It supports decision-making to increase productivity and profitability as well as the cost of producing goods or services and assessing performance.

Techniques: To precisely allocate costs to goods or services, cost accounting employs a number of techniques, including job costing, process costing, activity-based costing (ABC), and standard costing.

Industries: It is frequently utilized in the construction, manufacturing, and other sectors of the economy where there is a large amount of assembly or production of goods.

Important Metrics: In cost accounting, important metrics include cost per unit, cost variance, and cost efficiency ratios. Direct costs, such as labor and materials, and indirect costs, such as overhead and utilities, are examples of these.

Retail Accounting:

Focus: Managing the finances and performance associated with the purchase and sale of goods in a retail setting is the main goal of retail accounting.

Goal: To optimize revenue and profitability, it aids in profit margin analysis, inventory management, sales tracking, and pricing strategy optimization.

Techniques: To evaluate the financial health of retail operations, retail accounting frequently employs techniques like the retail inventory method, gross margin analysis, inventory turnover ratio, and sales per square foot.

Industries: Supermarkets, department stores, specialty shops, and internet retailers are among the companies that use it most frequently in the retail industry.

Important Metrics: Sales income, cost of goods sold (COGS), gross margin, inventory turnover, shrinkage, and average transaction value are important metrics in retail accounting.

The Advantages of The Retail Method of Accounting

You may be wondering why the retail accounting method is used in the first place, given some of its limitations. "The benefit is that it is very simple to compute and does not require intricate tracking of how much someone paid for each SKU they bought from a supplier." You can determine the value of your inventory with a small set of numbers even though it should be something you do regularly. You do not need to count your inventory or run inventory reports to use this method. Retailers who are concerned about paying employees to check inventory while the store is closed will benefit from that. 

Because it enables quick and reliable inventory tracking, multi-location retailers may find the retail method of accounting useful. This saves time and money by facilitating organization and offering a comprehensive view of inventory across all locations. 

Retail Store Accounting Software

The following list of well-known retail store accounting software names is accompanied by succinct descriptions:

1. QuickBooks: For retail businesses, QuickBooks is one of the most popular accounting software programs. It provides functions like tracking sales, expenses, creating invoices, inventory management, and financial reporting. It is easy to use and adaptable to the unique requirements of retail establishments.
2. Xero: Accounting software on the cloud that works for retail companies of all sizes is called Xero. It offers functions such as purchase orders, bank reconciliation, invoicing, inventory tracking, and reporting. To increase its usefulness, Xero also integrates with a number of outside apps.
3. Sage Intacct: Specifically tailored for retail enterprises, Sage Intacct is an all-inclusive cloud-based accounting solution. Features like order processing, vendor management, financial consolidation, multi-location inventory management, and sophisticated reporting capabilities are all included. It is adaptable and scalable to fit the requirements of expanding retail companies.
4. NetSuite: Specifically designed for retail enterprises, NetSuite is an integrated cloud-based business management suite with accounting features. Features including order management, financial management, inventory control, CRM, and e-commerce capabilities are available. Real-time visibility into a variety of retail operations aspects is made possible by NetSuite.
5. Zoho Books: This accounting software is appropriate for small and medium-sized retail enterprises. It provides functions including bank reconciliation, inventory management, expense tracking, invoicing, and reporting. To improve retail operations, Zoho Books also integrates with other Zoho apps and outside tools.

Conclusion

Business accounting has a bright future ahead of it thanks to changing industry practices and technology breakthroughs. In order to survive and prosper in the ever-changing business environment, companies need to adjust to these changes. The emergence of cloud-based solutions, automation, and artificial intelligence will transform accounting procedures, allowing companies to increase productivity, decrease manual errors, and streamline operations. 

For your complex accounting needs, Jordensky provides the knowledge and resources necessary. Businesses can increase revenue, maintain financial stability, and maintain a steady cash flow by managing their finances well with our help. Contact us today to regularize your financial operations for growth enhancement!

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Frequently Asked Questions (FAQs)

Q1: What are the essential accounting practices for retail businesses in 2024?

A: Essential accounting practices include accurate inventory management, timely financial reporting, and adherence to regulatory compliance.

Q2: How can retail businesses optimize their cash flow through accounting practices?

A: By implementing efficient invoicing and payment collection processes, monitoring expenses closely, and effectively managing inventory turnover.

Q3: What role does technology play in modern retail accounting practices?

A: Technology streamlines tasks like automated bookkeeping, inventory tracking, and data analysis, enhancing efficiency and accuracy in retail accounting.

Q4: What are some key performance indicators (KPIs) retail businesses should monitor through accounting?

A: Important KPIs include gross profit margin, inventory turnover ratio, customer acquisition cost, and average transaction value.

Q5: How can retail businesses ensure compliance with tax regulations and reporting requirements?

A: By staying updated on tax laws, maintaining organized records, and leveraging accounting software for accurate tax calculations and filings.

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