Understanding Financial Basics
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What did your last financial statement indicate to you about your business? If you say “It told me that we made a profit,” or “It’s just a year-end summary,” you would be wise to keep reading. While a financial statement does provide that information, it is really much more. It provides vital clues to what’s right and wrong about your store. You don’t have to be a CPA to read one, just familiar with the basic accounting terms and what they mean to your business.
A Comparison of the Cost Method vs. the Retail Method of Accounting for Inventory K.I.S.S. – Keep It Simple, Stupid – may aptly describe the manner by which many retailers calculate their all-important Gross Profit. For some, it works just fine. For others, "keeping it simple" can be disastrous. If you are using the Cost Method of accounting, you are using the more common method of inventory valuation. It is easy to understand and requires only simple records and management of a good point-of-sale inventory system. It’s the K.I.S.S. method...but may be the kiss of death! The Retail Method is more complex and requires more bookkeeping, but can be superior for controlling the Cost of Goods Sold.
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Retail business owners are conditioned from day one to have a profit and improve their bottom line. Yet, sadly, most owners aren’t sure exactly why. What is profit, where does it go, and why is it important? These are questions that we shouldn’t have myths about!
Owning a retail business is a little like riding a bike—there are going to be strenuous uphills, glorious downhills and demanding stretches in between. How you handle the ride is based on your ability to keep the wheels moving by combining judicious pedaling with knowing when to shift gears quickly and skillfully. Imagine your retail business consists of two large wheels, much like a bicycle. As a retailer, the bicycle you ride is called the working capital cycle. Its two wheels are called the sales wheel and the working capital wheel.
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No retailer really wants to pay for bookkeeping or accounting. But it's necessary for two reasons: (1) to accurately satisfy the I.R.S.; (2) to accurately show where the business has been and where it is now. This second reason is essential for what REALLY matters: doing better in the future! The ROI has developed The Screening Test for Retail Bookkeepers. As an ROI Member you may download a free copy of that test to use as you interview prospective bookkeepers. For more information, see The ROI's "Bookkeeping Articles."