Accounting Delusions

Does your store look good in your P&L and Balance Sheet? Does your accountant leave you feeling like you’re doing a great job? Well, think again.

Let’s look at the biggest flaw on your P&L statement. And that is the “Cost of Goods Sold” figure. While it may be correct accounting to use that figure, it would be more reflective of your situation if it were “Cost of Goods BOUGHT”. Sure it’s great to look at the cost of goods sold, but most retailers buy much more than they sell. And what is the cost of the unsold merchandise?

Unsold merchandise is much more expensive than sold merchandise as it continues to eat up overhead and keeps depreciating, getting shopworn, and going out of season if not out of style. Unsold merchandise is your unrealized profits. And every day, they dissipate.

Your accountant considers your inventory on your Balance Sheet as an asset. But is it? While it may be an asset the day it arrives (and hopefully a little longer), it begins to depreciate immediately as it heads toward being a markdown. So, how much of that inventory is really a liability?

The simplest accounting you can do is to subtract dollars going out from dollars coming in. The most important job you have as a retailer is to insure that there are more dollars coming in than going out. To do this, you will need to get multiple contributions to overhead and profit from the dollars invested in inventory. The only way to do that is to work turnover into your buying plan so that each dollar invested contributes more and more to your income.

Open-to-buy planning is the only way to properly plan buying centered on increasing turnover. The more you turn, the more you make. Any retailer not using open to buy planning is kidding themselves. Item selection, displays, personnel, location, décor are all great to foster sales, but your bottom line is based on your buying and how frequently you turn your inventory at full price. If you’re not using open-to-buy, you’re not maximizing your potential as a retailer.

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