Omnichannel retail is all about providing customers with an excellent experience, however they choose to buy from you, and changes to the way you do your accounting can directly affect this experience. For example: allowing coupons to be redeemed across any channel; managing cross-channel loyalty programs; making trade customer credit balances available for your sales team; and allowing B2B customers to purchase autonomously up to their credit limit and pay invoices online at any time of day or night. Improving financial insights means you have more of the right inventory on hand.
Omnichannel retail also brings other challenges to financial management, such as the need to report tax in a consistent way for sales that originate in different systems.
In this chapter we’ll dive into the detail of accounting and finance in an omnichannel business, explaining ways to track revenue, expenses and profitability so that you can use the data to drive your business forwards faster.
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Being able to measure performance is key for any retail business. Sales revenue is a quick and dirty measure, but profitability is a much better measure. Profitability of a product line, of a brand or of a channel. And combinations; what’s the most profitable product line on my eBay channel, for example?
Going back to retail accounting basics, we could produce a very simplified profit and loss report for the month (also called an income statement), that includes variables such as revenue, cost of sales and overheads to provide a gross and net profit figure.
That’s great, but it doesn’t show us anywhere near enough detail for us to make buying, listing or promotion decisions. Good retailers make business decisions from accounting data, so this report is going to need much more detail.
Leading retailers make business decisions using accounting data, where they know the outcome of those decisions will improve not just revenue but also profit
First let’s take a look at the revenue line. That’s usually pretty easy to get more detail on. Even if you don’t use a retail management system or integrated accounting software, your sales channels will be able to produce revenue reports directly. Ideally without the tax, which varies per buyer and introduces inconsistencies that we don’t need at this point. So it’s fairly easy to say “I sold £28,000 via Amazon and £22,000 in-store” … but again that doesn’t really tell you much. Even though Amazon revenue was higher, you might have actually made more profit on the in-store sales due to the commission and shipping costs of the Amazon sales.
In order to calculate profit, we’ll need to know Cost of Sales and Cost of Goods Sold (COGS). The price you paid for inventory is the crux of the calculation. Using supplier cost price lists isn’t really good enough. Who knows whether you actually paid those prices? Perhaps some items were bought in bulk at a discounted price, some were on promotion at the end of the season, and maybe you were even over-invoiced for some! Without knowing the exact price you paid, it’s impossible to work out an exact profit figure.
Maybe some items were shipped in by expensive air freight at short notice, and some came cheaply and slowly by sea. We need to include the cost of getting the goods to your store or warehouse in the first place - the ‘landed’ cost. If you only account for purchase freight and duty as an overhead or indirect expense, then you’re not really looking at the true cost of getting the inventory which sits underneath your sales figures.
A quick and dirty calculation of profit using average margins is going to be useful to a point, but this is really only a guess. When you start to drop your prices during promotions, things get even less accurate.
We’re going to do things a better way. Read on to find out how.
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