MARKET WATCH: Gross Margin Dollars and Accounting Systems

Jeff Harbaugh

• May 29 2009
• 690 views
• 4 comments

I’ve been doing a lot of thinking (which is now turning into writing) lately on the need to focus on generating gross margin dollars rather than sales increases because of the economic conditions we’re facing and are going to face in the future. Briefly, sales increases like we got use to are going to be hard to get, so you’d better be focusing on the gross margin dollars you generate to pay your bills. This involves careful analysis of your gross margin percentages, inventory turns, markdowns, cost of capital and pricing for all the products you sell. It’s true whether you’re a retailer or a brand.

You can’t do the kind of analysis I think you need to do unless you have and use well a quality management accounting system. To do that, you have to 1) buy the hardware, 2) buy the software, 3) learn to use it, 4) set it up correctly and input good data and, 5) keep it updated. It takes a few dollars (though a lot less than it use to) buy the system and a serious and ongoing commitment to maintaining and using it. Every retailer and brand should have been doing this rigorously just because they were in business and because if they weren’t they were leaving bucks on the table.

But at least in the case of a bunch of retailers that often doesn’t seem to be how things are.

ActionWatch collects and analyzes sales data from our industry’s retailers by SKU and provides an excellent data base that you can manipulate to get high quality, reliable information about what’s selling and at what price. So President Cary Allington likes good data from retailers with good point of sales (POS) systems.

About three years ago, he surveyed 2,000 retailers.  A little over half said they were using POS systems.   He thinks the number has gone up now.  Click on this LINK to see what percentage was using which system at the time of the survey.  As you can see there are a lot of choices.

He’s also aware of many retailers who never run reports using their systems, and of many who use their systems only as cash registers- that is, they don’t use the systems for inventory tracking or analysis.  My guess is that these retailers buy the systems in a fit of enthusiasm and in recognition that they need it, but then don’t take the time or aren’t willing to spend the money to get it properly set up and their people trained on it.

It is intimidating to try and pick the “right” software package with all the choices available.  (Hint: any is better than none). The Board Retailers Association offers members a discount on a book that helps you choose the right system. You can see that by clicking HERE.

They also offer discounts on a number of POS systems and the associated hardware, and have done some articles and seminars on selection and use of systems. Just as an aside, it is an absolute mystery to me why any retailer in this industry wouldn’t join BRA. You can’t help but get the $125.00 annual fee back many times over from the discounts they offer alone.

Even more challenging than selecting your system is setting it up so you make the best use of it.  This is not just a matter of turning it on and inputting your current inventory and pricing.  You have to start by deciding what information you want to see and what decisions you want to make.

Do you really want to see a report that tells you every pair of shoes you sell broken down by brand, style, color and size? Do you just want to know how many pairs you sold?

The former is probably too much data. The later is too little. To paraphrase Goldilocks, something in the middle would be just right. But what exactly?

Forget systems for a minute. What decisions do you need to make and when do you need to make them?  What do you need to know? What reports would you like to see and when? With that information in hand, you’re in a better position to show your requirements to various vendors and determine if their systems do what you need. They’ll all say “Yes!!!” so make sure you dig down deep in your evaluation. The devil is for sure in the details when it comes to selecting and implementing management accounting systems.

Using a quality system well will make you more money. I don’t consider that an opinion- it’s a fact. It can increase your inventory turns, improve your ordering and sell through, reduce marks down (but make sure you take them when you need to) and improve your return on investment.

It will give you more gross margin dollars. Those dollars are what you pay your bills with.

Jeff Harbaugh is a consultant for the action sports industry and works with companies to identify and focus on critical business issues and opportunities fundamental to the bottom line. For more information, visit www.jeffharbaugh.com.