Retail is a big business. According to the U.S. government program SelectUSA, there are over 3.8 million retail establishments in the United States. These retailers accounted for nearly $2.6 trillion in sales in 2016, the most recent date for which data is available.
Retail might be big business, but small and medium-sized businesses have a significant impact on this sector. Small and medium-sized businesses have a more substantial stake in the marketplace now than at any other point in history, especially with the continuing growth of e-commerce.
Unfortunately, big retail businesses often have the upper hand when it comes to having the knowledge and tools necessary to make their businesses profitable. Retail businesses have unique challenges, not the least of which is business accounting—especially for inventory. This is such a significant challenge; we have devoted a practice area to retail accounting.
What Is Retail Accounting?
The term "retail accounting" is a bit of a misnomer. Retail accounting isn't a special kind of accounting process or system, but rather an inventory valuation technique often used by retailers. It differs from "cost accounting" for inventory in that it values inventory based on the selling price rather than the acquisition price.
Managing Inventory Cost—Your Biggest Challenge
Your retail business's inventory likely represents your most significant expense. But inventory is unique in that it isn't an expense until you sell it.
If you find this confusing, don't be alarmed. Inventory is considered an asset—something your business owns, which is recorded on your business's balance sheet—until you sell it or account for it as shrinkage from theft or damage. At that point, the expense for the purchase of the inventory is recorded as cost of sales (COS) or cost of goods sold (COGS) on your profit and loss statement.
Inventory's Impact on Profitability
As you can imagine, the cost of your inventory has a significant impact on your business's profitability. This makes effectively managing it critical to the success of your retail business.
You can significantly impact the profitability of your retail business by paying close attention to your gross profit margin. The gross profit margin metric is so powerful, and you can realize significant increases in your business's bottom line just by adjusting the gross profit margin a few points. This means you can increase your business's overall profitability without having to make a big push for more sales!
But to do this, you have to know the cost of your inventory. This brings us back to inventory valuation methods, including retail accounting.
Leave the accounting to us.
If you'd like to learn more about our retail accounting services, fill out the contact form below. You'll be glad you did!
Please fill out the form below to contact us.