Retail Accounting vs. Cost Accounting

Inventory management is an important aspect of every retail business. To maximize profits, companies need the right amount of inventory items at all times. Inventory count determines both inventory shortages and the amount of inventory on hand at any time. In accounting, a business must establish the cost basis of this inventory. Cost accounting is a more conservative inventory valuation method that values inventory based on its cost. Retail accounting, on the other hand, values inventory based on items' retail price.

Inventory at Cost MethodsThere are three primary cost accounting methods to value inventory -- first in first out, last in first out and weighted average cost. Small businesses typically use the FIFO method, although the accounting method does not have to reflect the physical flow of goods. Companies that have a wide range of products often adopt the weighted average method. To calculate the value of inventory using this method, multiply the cost of the merchandise by the number of items held in the inventory at that price point. The next step is to add the amounts for each group and divide the result by the number of weighted price categories.

Retail Method of InventoryRetailers often use the retail inventory method to value inventory. In most retail businesses, you can see a clear pattern between the cost of products and their retail price. This enables retailers to convert retail prices to cost for inventory valuation purposes. To calculate the final cost of the inventory using this method, calculate the cost-to-retail ratio for a specific year and multiply the ending inventory retail value by this ratio.

Related Reading: SignificanceRetail businesses can use the projected retail cost to value the inventory. Even businesses that hold a large and diversified inventory can maintain a perpetual inventory of all merchandise items through the use of sophisticated computer software applications that connect to the point of sale. The accounting value of inventory, however, will differ depending on the valuation method. Many businesses use the retail method of calculating inventory value because this method does not rely on labor-intensive physical inventory counts.

ConsiderationsInventory valuation is an important function in retailing. Manufacturing companies typically use the original cost of materials to value inventory, as they do not sell directly to end customers and do not set the retail price of goods. Retailers, on the other hand, commonly calculate the cost of inventory at a retail level. Significant differences in valuation, therefore, can exist depending on the valuation method selected and the retailer´s markup beyond the wholesale cost of the inventory. The Internal Revenue Service allows businesses to use either the direct cost method or the retail inventory method for tax-reporting purposes.

Accounting systems for retail operations are more than just point-of-sale systems. An integrated retail accounting software system provides a suite of tools designed to make your retail operation more efficient, easier to manage, and more profitable. With the right software technology you’ll be able to increase margins with better inventory control, generate additional sales due to suggestion selling, track staff performance, and optimize your marketing efforts.

Today, it’s important that your retail software provides more than a way to receive customer

payments. Customers have more buying options than ever before. In an increasingly competitive

retail environment, tools that can help you better anticipate and meet customer demand, as well

as execute transactions with ease and convenience, are critical components to retail success.

Retail management software systems are helping retailers answer some core business challenges,

including:

How can the convenience and speed of the actual purchase transaction be improved?

How can we collect and tap customer information in order to better meet customer demands, increase sales, and build customer satisfaction?

How can administrative tasks be automated and improved to lower the overhead costs?

How can we effectively manage product pricing to ensure maximum revenues?

How can we manage relationships with suppliers to get better pricing and partnership terms?

The top 13 most critical components of a full retail management solution

Retailers are increasingly demanding comprehensive software suites. Generally, integrated

systems require less time to learn and are easier to support than piecemeal systems. In order to

leverage existing technology investments though, many retailers seek out task specific programs

to augment their current capabilities. There are many options available to you on both fronts.

Whether you need an add-on module or a full system, strong software capabilities in the

following areas represent opportunities to improve your chances of retail success:

1. Point-of-sale (POS). Point-of-sale software handles all aspects of the purchase transaction. The ability to provide a quick and easy purchasing experience is one of the key differentiation opportunities for your retail business. Traditionally, POS software ran on a computer located at the sales counter. That’s still often the case of course, but many retailers are also taking POS software to the sales floor. Providing sales associates the ability to conduct part or all of the transaction on mobile devices can not only improve the customer

experience, it can make a memorable impression on customers. Regardless of where the transaction occurs, effective POS software needs to handle multiple different payment options smoothly. Modern POS systems are optimizing the purchasing experience whether customers are purchasing via cash, credits, checks, or even gift cards. POS software integrates with your POS hardware in order to allow for cashier item inputs, product bar code scanning, check and credit payment processing, and receipt/invoice printing.

2. Accounting. The ability to streamline your accounting processes is one of the most underrated opportunities to lower your retail business’s overhead costs. A complete accounting solution will provide functionality to manage accounts payable transactions, bank reconciliations, and fixed asset depreciation. Tight integration between your cross-platform sales channels and accounting provides the opportunity to import full transaction details to create an auditable record of purchase histories. The ability to document assets and liabilities, as well as expenses and revenues in your general ledger is a key component of effective retail financial management.

3. Customer relationship management (CRM). The better you understand your customers, the better positioned you are to meet their needs and increase sales. CRM modules provide you with the capabilities to turn customer information, including sales histories, into actionable business intelligence. For instance, a CRM module can help provide customer service representatives with personalized upsell and cross-sell recommendations based on the customer’s previous purchases. CRM software is also useful in terms of managing marketing efforts. Marketing groups can be established based on customer purchase histories, demographics, and location. Many CRM modules also include capabilities to directly execute email, direct mail, and social media based marketing campaigns right from the software.

4. Reporting. Your retail businesses has a rich source of business information, if you have the ability to easily store and access purchase transaction records. The ability to identify trends and transactions in customer purchasing is critical to spotting profitable business opportunities. For the multi-store retail operation, it’s very important to be able to not only report on the enterprise as a whole, but also to flexibly break reporting down to the store, district, or channel level. Advanced retail reporting capabilities allow retail executives and store-owners the ability to identify sales trends and adapt to shifting customer demand. Dashboards and business intelligence systems are incorporating more and more sophisticated capabilities to turn key performance indicators into actionable business information.

5. Inventory control. Inventory control modules provide you with the ability to track and access critical product information. Typical data points that inventory management solutions will track include item titles, SKU numbers, product descriptions, supplier SKUs, stock counts, item locations, and pricing. For many retailers, further product fields are required and the ability to customize additional product fields is a standard feature of most inventory modules. Similarly, many inventory control modules will provide the ability to handle bar-coding, lot tracking, and serial number tracking. For some types of retailers, matrix pricing and product configuration options may be required.

6. Purchasing. Effective purchasing software capabilities can help your organization not only better meet customer demands, but also better manage supplier relationships to

negotiate lower costs and improved business terms. Purchasing systems do much more than provide the ability to cut PO’s. Sophisticated purchasing systems will integrate with inventory control to provide alerts and automation when stock levels are low. Demand planning features can help you anticipate customer needs to avoid shortages and back-order situations that can threaten customer satisfaction and loyalty.

7. Price management. One of the main challenges facing your retail business is figuring out appropriate product pricing. Price management modules bring a normalized, data-driven approach to this challenge, helping you to optimize pricing to find the right balance point between maximum margins and keeping products moving. Price management software utilizes rules based management that integrates real product histories to help you set optimal pricing points. Planning for phase-out dates and stock movement rates can help you determine when it is appropriate to discount items and by how much.

8. Sales tax calculation. Sales tax calculation is one of the areas where software automation can make an otherwise time-consuming and challenging business issue a snap. Many POS and full retail suites integrate with sales tax compliance systems to automatically apply relevant sales and use tax based on customer or delivery location. Sales tax calculation capabilities can be integrated across sales-channels to manage sales tax both for on-premise and online transactions.

9. Promotions and loyalty programs. Promotional pricing, loyalty programs, and coupon discounts are key tools in the retailers arsenal for attracting new customers and strengthening existing relationships. The management of these programs can be difficult though. There are many out-of-the-box solutions on the market though that prevent retailers from having to re-invent the wheel when it comes to promotions and loyalty programs. Software tools can help your company more easily create and manage promotions and loyalty programs. Additionally, these software options will allow you to capture customer data that can be passed to your CRM to assist in future marketing efforts.

10. POS hardware. POS hardware is generally designed to be compatible with a variety of retail management and POS software. However, many retailers prefer to purchase fully integrated software/hardware solutions from the outset. POS hardware can include credit card swipers, touch screens, cash-drawers, printers, check processing devices, and specialized keyboards to assist with quick item entry.

11. Credit card processing. It’s been a long time since the cash-only model was a realistic option for retailers. Effectively managing for credit card processing is a critical element of the retail business. Full retail software suites will include the ability to integrate with a variety of different payment gateways and handle pre-authorizations.

12. eCommerce. The ability to execute sales online has revolutionized the way many retailers do business and added a very important sales channel. There are full retail management and accounting suites available that integrate complete eCommerce capabilities, including web stores. More often, though, what’s critical is that the transaction and order detail from separate web stores can be integrated easily into the accounting records. Whether you require a fully integrated solution or the ability to incorporate web transaction histories, there are solutions available that can help you optimize your online selling in a way that maintains the integrity of your accounting records.

13. Payroll and HR. The retail industry faces some challenges when it comes to payroll and HR. Retailers generally have relatively high turnover rates. Consequently, the importance of quickly setting up payroll and HR information is amplified. Many retailers also pay employees on a commission basis. Commission calculation capabilities can be an important part of the payroll module. A complete payroll and HR solution will allow your business to track employee info, process and track payroll payments, handle tax related payroll reporting, record employee time and attendance, and manage and administrate employee benefit and pay raise eligibility.

Ease of use

With increased capabilities in integrated retail accounting software systems, there is a need to

make sure that the software is still easy to use. Set up wizards, help screens, and simplified

touch-screen interfaces are typical approaches to making sure that increased functionality doesn’t

lose it’s impact by becoming overwhelming.

Taking the next steps

If you are at the point where you are ready to find which retail software options are right for you,

we can help. Through a brief phone call, our software specialists will look to better understand

your business and software needs to help you locate a handful of solutions that can address the

issues you are currently experiencing.