Why use accounting software for your retail business?
Half of New Zealand start-ups fail in their first two years of operation. For some it’s not because they’re unsuccessful; often the failures can be pinned on poor cash flow management. And poor cash flow management can usually be blamed on a less-than-clear view of the business’s financial situation. That’s why a good accounting software package is one of the first assets any start-up retailer should think about buying.
A great accounting package is much more than keeping tabs on what’s going in and out. It’s about managing inventory, paying staff, analysing income flow and providing reporting that supports educated decisions. Having a cloud accounting platform on your side can make all the difference between just surviving and thriving in the cut-throat retail sector.
Retail is more than just sales
Every retailer knows that business involves more than just selling stuff. There’s a whole bunch of research that happens before you even open your doors. For starters, you have to decide the best way to sell - whether it’s a full eCommerce site, a pop-up-shop, a suburban retail outlet or a combination of these. Then there’s hiring staff, paying vendors, ordering the right kind of stock, marketing and merchandising, couriers and shipping, dealing with suppliers and managing customers.
There are also seasonal challenges to manage; more so if you’re a business that sells ski gear, Christmas decorations, swimsuits or other highly seasonal products.
As well as all the day-to-day challenges and physical problems a retailer has to manage, there’s money to think about. Payroll, GST and PAYE, profit margins, cash flow and, somewhere, paying yourself income too. That’s a lot of financial balls to juggle, so it’s easy to imagine one of them getting fumbled.
While a few late payments to suppliers might not be a problem today, it could quickly become one. And while cashflow might be great in December, what happens in February when you need to pay suppliers after a quiet January?
You need to have quality accounting systems to get the quality financial information that helps you to run a successful business. You need to be ahead of the game.
Plan for success in retail
Take your time when setting up your new retail venture. Create a business plan that addresses a range of issues. By thinking through every aspect of your enterprise, aided by expert accountants and business mentors, you’ll identify potential problems in your plans and processes, and also some ways to grow your company. A good plan also has targets and goals, creates accountability, and sets you on a path to success. In your plan, think about:
- Company structure: Sole trader? Partnership? Limited liability company? Each structure has benefits and problems, so you need to make the right choice for yourself. Make sure you look into this thoroughly. While a limited liability company might seem like a good option that protects you from the consequences of any bad decisions, it comes with increased paperwork and compliance.
- Business location: Whether you want a physical or online store, you need to consider where you best fit. For an online store, should you be on TradeMe or Amazon? Or should you have our own URL? And what about a physical shop. Downtown or suburbia? Which location will deliver the customers numbers you need? Would a higher rent in a mall pay off with greater traffic? If you have both online and physical stores, how will you manage stock? Should you have a POS in the cloud? How can you ensure that stock levels are visible and always accurate?
- Funding options: How much money do you need for the set-up and fit-out of the store? How much will your initial stock cost? How long until break even? It’s possible you’ll need to create a set of accounts for potential lenders.
- Stock and inventory: Order too much and you’ll be left with unwanted or heavily discounted products. Order too little and you’ll miss out on sales. How do you manage your inventory so you get it right, every time?
How retail accounting software can help your business
There’s more to modern accounting systems than just profit and loss statements. There’s a whole range of plug-ins available that make life easier and your business better. They all sync up with your software and should work in tandem; from a POS system, where the day’s takings are automatically uploaded to your accounting system, to a stock management system that goes from the POS, to the stock levels in your online store, and alerts you when stock levels are running low.
Work out which accounting package can offer you everything you need.
- Does it work for retail stores? Not all accounting packages are geared to suit retail environments.
- Does it have different permissions? A manager or owner will need different levels of access to people on the shop floor.
- Does it manage payroll? Some don’t have payroll as part of their core functionality.
- Does it track inventory? This is incredibly important to find out, because this is foundational aspect of your business. Check they have a plug-in for your needs.
- Does it operate in the cloud? Cloud based systems are safer, as the data will always be there. PC-based systems, where information can only be accessed from one place, can be riskier and more prone to breakdowns. You should be able to access data securely from anywhere and not have to worry about backups or what happens if your computer breaks.
- Will it grow with your business? Is the solution scalable, letting you add or remove users as needed. Will you be able to add functionality as your business grows and changes?
Understanding retail accounting
There are a number of accounting terms that crop up all the time in retail. Make it your business to understand these.
- Accrual or cash accounting method: Cash accounting is based on actual cashflow, while accrual accounting is based on invoicing dates.
- FIFO or LIFO inventory tracking is known as First In, First Out, or Last In, Last Out tracking. It’s an accounting method to determine the value of unsold inventory and is affected by inflation.
- Weighted average of cost is a method of calculating inventory cost when all items are so varied that it’s impossible to assign a specific cost to an item.
- Retail inventory method is when you estimate the value of your inventory using the cost and retail price, taking away the cost of inventory and cost of purchases.
These are just a few of the retail accounting terms that will soon be part of your vocabulary; an accountant or business advisor can advise you on others you should know.
12 ways to ensure your retail accounting is accurate
- Record every transaction. That means everything. Sales, purchases, cash purchases, tax bills. They are all important to create a clear picture of your business.
- Reconcile. Every day, make sure all the numbers add up. If you leave it longer, they start to stack up quickly and then details are forgotten.
- Money in vs money out. The difference between the money going in and the money going out is your profit. Keep an eye on this to see your performance on a day-to-day basis.
- Collect all tax information. Find out how long you’re required to keep tax information for. In New Zealand, it’s seven years. Store both soft and hard copies securely. Keep soft copies in the cloud. Because disasters can happen (in earthquake damaged buildings in Christchurch, for instance), aim to store paperwork in waterproof, strong, well-labelled boxes.
- Set up your accounting ledgers properly and know your codes: What’s a liability? What’s an expense? What are drawings? Your accountant should set up your ledgers and explain them to you. Make sure all your expenses and tax bills are being allocated to the right codes.
- Keep your accounting software updated. This means that every day you should be transferring receipts from purchases and sales in your ledger. If you can’t do this daily, automate the process with a plug-in.
- Get the professionals involved: It doesn’t have to be every day, but once a month, get your accountant to review your ledger. This helps you to identify discrepancies and problems sooner rather than later. It will make your end-of-year financial reporting process faster and smoother too.
- Get regular reports: Reporting helps you to see and understand what’s going on. From looking at cash flow and potential future shortages through to assessing if you’re hiring enough staff, reporting gives you insight into your business.
- Keep a paper trail: If you aren’t able to keep physical receipts for everything, keep digital copies in the cloud. Capture receipts, invoices and any other relevant paperwork to do with wages and inventory.
- Keep your personal and business life separate: Have separate bank accounts. Some people have multiple bank accounts for putting tax aside, or for managing revenue and expenses.
- File your tax returns: If you’re forgetful, then put the deadlines for PAYE, GST and income tax into your calendar. If you don’t think you’ll be able to file things on time, pay a pro to do it for you. Tax is non-negotiable and the fines can be painful.
- Cash flow is king: Set up controls and processes to ensure your cash is flowing where it needs to be. If you’ve had a quiet month, know that one or two months down the track is when the crunch happens. Don’t get caught out, because it’s a slippery slope downhill once you miss a supplier payment.
Keep up with the trends
Retail is a fast-changing industry. Only 10 years ago, people had limited options online, but now you can find multiple online stores for everything you want to buy, all in seconds from your smartphone. As a result, customers want more from their retail experience. If you want to stay ahead of your competitors, you have to try harder. Here are some tips for that:
- Mobile and apps: More than half of internet traffic is from mobile devices, and that percentage increases every year. Your website should be easy to use on a mobile; you should even consider developing an app.
- POS apps: A point-of-sale app on your phone? Easy. With options like Vend you can have seamless purchasing from anywhere you are.
- GPS searches: Searching by geographic location is incredibly common. Make sure you’re registered for Google My Business, so you’re not missing out on a huge slice of the sales pie.
- Online shopping competition: People can search for what you’re selling and have three alternatives in seconds. Customers know if your pricing isn’t competitive. Don’t undercut yourself, but if your competition is half your price, don’t expect a lot of sales.
Technology means you can’t hide: That bad review on Google and great review on Facebook are there for every potential customer to see. Make yourself visible where your target market hang out - Facebook, Instagram or Pinterest – and polish up your customer service, so that every review is a good one.
Don’t get left behind
The right software is essential for running your retail business. It should enable you to see immediately what’s happening and make changes when required. Are you spending too much on staff or not enough? Are your products too expensive or could you charge more for them?
With a multitude of retail-oriented plug-ins and apps that work seamlessly with your accounting package, you can keep your finger on the pulse of business. You can also make sure the future doesn’t hold any nasty surprises, like tax payments you’ve forgotten about or supplier payments that slipped your mind. Forewarned is forearmed, and that’s the path to retail start-up success.
For advice about which accounting platform would be best for you, talk to a chartered accountant who understands the retail sector.