Once upon a time

Having passion for the busines; not just what you do

Once upon a time there were two friends who rode to work together each day. Along the way they would always notice a truck parked on the side of the highway. The truck was parked with the tail gate down and facing the road so that all passing by could see the bed of the truck was full of bags of oranges; all kinds of oranges. A sign on each side of the truck said, “Oranges $20 per bag”.

They noticed there were always cars parked nearby with people standing in line to purchase a bag. They had purchased a bag and hung around to watch this merchant and their customers interact. Customers told how they thought these were the best oranges and how they enjoyed oranges in many ways.

“That must be a wonderful way to make some extra money. Let’s go to Florida, bring some back, and go into business for ourselves”, said one of the friends. “This would be easy. We have always liked oranges. We squeeze our own orange juice, eat orange slices, make orange marmalade, and are always looking for new ways to enjoy oranges.”  

They shared the same enjoyment for oranges as the customers of the roadside stand. And with that, plans were made to go into business.

The two rented a truck and drove to Florida, finding an orange grove where they bought and filled their truck with two hundred bags of oranges. They gave the man $4000 and drove back to their home town. They felt confident of their future success as they believed they were better salespeople than the first person, and their oranges were of a higher quality.

They made their signs with a message of, “Fresh Florida oranges only $20 per bag” and proceeded to open their new business on a Saturday morning on a street near the other orange vendor. By Sunday afternoon they had sold all their oranges. The truck was returned, and the two friends sat to total the sales and expenses of their new business.

The expenses were truck rental, fuel, two poster boards, a marker, the cost of the oranges, and the meals while traveling to and from Florida. They counted their cash. They found that even with having sold all their bags of oranges, they had to take cash from their pockets to pay all the expenses.

“What did we do wrong that we lost money?”, asked the first new merchant.

“Simple”, said the other new merchant. “We need a bigger truck to carry more oranges. We will make it up on volume”.

This story could be the moral for several lessons in business; inventory control; competition; and even going into business with a friend. However, the story serves as our starting point for our lesson about being in business.

The first lesson deals with the reasons for being in business; selling a product that you like with a friend who likes the same product, in the town you want to be in are all very wrong reasons.

You select the product, community and any partners because of several reasons. The products are ones you can sell to customers who want to buy with any partners who bring specific ownership skills to the partnership.

You can learn about the products you want to sell and you can hire people who know about the products. However, you cannot hire someone to take your place as the owner.

Understanding the strategy of what kind of business you should own; determining the marketing to tell your potential customers about the products and services you sell; being able to understand the many components of a profit and loss statement, the balance sheet, budgets, cashflow planning, inventory control; and creating the methodology for teaching your employees how you want them to take care of your customers and your store.

These are the responsibilities you have as the owner of the business. You can hire a salesperson and/or manager, but you cannot hire an owner.

All of these “owner responsibilities” may not sound to you as much fun as selling and enjoying, however it is the most important part of what you should be doing. Perhaps it is best explained with an example of an individual.

Being single, a person has the responsibility of only taking care of themselves. However, where there is a spouse or children involved, the person has others that are more important than themselves. The example could translate to a store; when you are a salesperson you have but one responsibility. When you become the owner, the management of the store becomes more important than you being a salesperson.

Let’s look at some of these “most important” responsibilities. You likely work with an accountant. If not, let us suggest you seriously reconsider that decision. We have unfortunately seen multiple retailers who have gotten themselves into financial challenges with their store, and yet refuse to get the help they so desperately need.

Accountants can be intimidating. For many retailers the accountant speaks a technical language we cannot understand. If you love owning a store, you must have that sincere conversation with the accountant.

Make an appointment, or write a letter to your accountant. Tell them you have decided it is time for you to understand what they are saying. At the same time, let them know you need them to speak and communicate with you in layman’s language. To that point, tell the accountant you need to be learning about retail finances. What YouTube videos will they provide you links for? Are there books and articles they would suggest you read?

If they have nothing to offer you in the way of suggestions, you may need to start looking for a new accountant. The responsibilities of owning and managing the store requires an active partnership between you and the accountant. Some accountants do not want a partnership; they want you to put the necessary documents in an envelope and leave them alone to do their work. If you are going to understand the financial side of your business, this is not the accountant for you and your business.

Being the store owner who puts a bunch of papers in an envelope that is sent to the accountant is not active participation on your part.
Having financial statements monthly that you cannot understand, and not having enough knowledge about financials so that you are making decisions is not an active participation.

Perhaps you have utilized the same accountant for many years. Having not been audited, completed the appropriate reports on time, and never receiving a letter from the IRS should not be the standards by which you decide you have a good accountant.

Let’s look at some questions you could ask yourself and the accountant. There is plenty of time for you to make a big difference in your store for this year.

Perhaps your store is experiencing a tremendous sales increase. When you tell this to the accountant, is there any response other than, “good for you”?

There should be a lot of response. Sales increases, while you are glad to have them, have to be planned. The growth in sales requires money that has to be paid in advance. To have an increase in sales means you need more inventory and perhaps more staff. You even need more bags to put the merchandise in. Thinking you will sell the additional inventory and then pay for it is an incorrect thought. The accountant should be helping you create a chart that shows how much growth you can afford.

If you cannot understand the information on your profit and loss statement, that information can be rearranged in a different format. As examples, if you have sales and service as a part of your business, you can have those two revenue streams broken out. Doing this, along with breaking out expenses, can tell you if you are making money in each category. If you are wanting to know this answer, is your accountant suggesting ways of getting the answer?

Looking at the expense side of your profit and loss statement, simply for understanding and making decisions, you can rearrange the information in a format that helps. If your net profit is low, someone analyzing your business is going to look at several categories; payroll, occupancy, advertising, and expenses overall.

This person will likely tell you that your payroll should be a certain percentage of sales. However, payroll should include all expenses related to payroll – your pay, the employees, payroll taxes, workers compensation insurance, benefits and any other related expenses. Are your expenses arranged like that? They could be if that makes it easier for you to understand your business.

Occupancy is very similar. It should include your rent or mortgage payment, taxes, building and inventory insurance, water, electric, gas, sanitation and repairs. Then you will truly know how much it costs you to have your business in the current location.

Advertising includes donations and contributions, your website, telephones, and the expense, including pay, for people doing your social media.

Could your seeing this different arrangement help you to understand your business and make better decisions? What does your accountant say about this?

The top line of your profit and loss statement is your sales. Within in the next line or two is the “cost of goods sold” followed by “gross margin”.

These two tell you how much the cost of the goods that you sold to produce the sales on the top line. The gross margin, stated as a percentage, is telling you what percentage of each dollar of sales is the amount left after paying for the inventory. This gross margin should be fairly consistent from month to month. Unfortunately, we see those statements with gross margins that vary. As an example, one month could be 22% and the following month it is 85% with succeeding months being anywhere between those two. Something is being reported incorrectly!

The check for inventory could have been incorrectly recorded as an expense. Another possibility is that the statement is reporting the inventory received or inventory paid for as compared to correctly reporting it as inventory sold.

This error is very obvious to any person who can read a profit and loss statement. Any accountant who is allowing you to receive a profit and loss statement with this error is doing you a tremendous service. And telling you the error will be corrected in the succeeding month means you will have two months with an incorrect profit and loss statement.

One last suggestion. Many business owners gather all the appropriate papers and deliver them to the accountant in late January or early February. By early March the accountant has the annual tax return prepared and wants to meet with you to review last year. As you can do nothing to change the tax return, what do you expect to achieve with this meeting?

We would suggest in place of this meeting, one that is held in May when you have the April financial statements completed. With this, you have one third of the year completed and you can compare this year to last year. Now you have two thirds of a year to use these comparisons to guide your store. You would know what to start doing, stop doing, and what to continue doing. This is a meeting with positive results!

One final thought from our story and examples. Our orange salespeople got into business because they wanted to have fun. Retailing is fun, but only if you are making money. If you understand the financials, you will understand how to make money.

And that accountant? Even if you have had the same accountant for the past 15 years and think you are pleased with them, if you learned something about accounting by reading this article, you may want to address the relationship with them. They should be the person who is actively teaching you how to utilize the information in your business.

Be glad this article is here to support you, but tell the accountant to be doing their job; all of it.

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