Accounting
March/April 2001
False
Impressions
By Geoff Coy, Certified Practising
Accountant
In today's low margin convenience retailing, one under-performing area
can cancel out the profits from the rest of your business.
If your profits are lower than you expect then why not take time out
and have a good look behind the scenes.
Recently I was asked to visit a dealer who was concerned at the lack
of profitability at his site.
The dealer had operated the site for over five years. He didn't have
five years of experience in running the business but rather one year's
experience five times.
Base on his expectations of the site, Mr Dealer should have been doing
a whole lot better.
The site had reasonable and consistent turnover with monthly sales of
:
ª Fuel
averaging 300,000 litres.
ª Store sales of $120,000
Long hours
not the answer
Mr Dealer was committed to the business, working long hours, reluctant
to take time off for holidays, careful in his selection of staff and
other ways in which he carried on the business.
Why then was he under performing? struggling to make profits? and wrestling
with a cash flow problem and paying himself a below average salary?
Unfortunately, Mr Dealer was not paper work orientated and could not
concentrate on the small details required in running a business of this
nature. Instead he relied on the honesty of others around him to inform
him of what was happening.
Management information available to Mr Dealer suggested that he was
making 34% gross profit from shop sales and a margin of 3.5 cents per
litre from fuel.
Gross profit
only part of the picture
Unfortunately, the paper gross profit led Mr Dealer to believe he was
making money when he wasn't. The management information he was provided
with failed to take into consideration the following:
ª damaged and
outdated stock l incorrect mark up applied
ª poor stock control l theft &
wastage
ª unrecorded sales l fuel evaporation
ª short deliveries
The inflated gross profit had given
Mr Dealer a false sense of security over his business to the degree
that he was employing staff that he not only did not need but could
not afford.
The false information he was receiving also led Mr Dealer to believe
he was making profit from the business when in fact the business was
losing money.
Believing in the information he was receiving, Mr Dealer even went out
and leased an expensive new motor vehicle.
Based on the above information Mr Dealer thought his business was generating
about $48,000 per month in gross profit when the actual amount turned
out to be more like $35,000.
Check the fine detail
Mr Dealer was also under the impression that his monthly wage bill calculated
to approximately 25% of the gross profit generated, when in fact it
was closer to 36%. He was also shocked to learn that the merchant fees
involved in making sales were nearly five times higher than he expected.
As a result of the new information he was receiving Mr Dealer had no
option but to bring in the 'razor gang' to slash his staff and introduce
other cost cutting measures.
Mr Dealer was also relying on a computer system that only produced half
the story. This gave rise to inaccurate and incomplete financial information
ultimately produced by his accountant.
Keep Accurate records
To ensure the above problems did not recur, Mr Dealer needed to be confident
that the information extracted from the computer system and given to
his accountant was complete and accurate. This meant spending more time
on paper flow and data entry.
In turn, this would lead to reports received by his accountant that
were more timely, meaningful, precise, easy to read and interpret.
Most people are not nearly as successful as they can be. A successful
business person relies heavily on the information supplied by his accountant
about his business.
It is most important that your accountant understands your business
and your industry. He should be able to give you all the information
you require to run your business efficiently and to tell you how your
business stands up against the industry.
He should also talk to you clearly and concisely and inform you of how
your business is performing.
Remember, you are paying for the information and advice so make sure
it is presented to you in a way that you can understand easily.