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The ROI's Glossary of Retail Financial Terms
Becoming Fluent in “Banker-ese”
(A through C)
Have you ever nodded knowingly when someone talked about his/her (or your) current ratio, all the while wondering what “current” meant— let alone “ratio?”
Have you ever asked your bookkeeper for a list of your accounts payable so you could “get those people to pay us?”
Have you ever secretly dreaded that someone would find out you don’t know all that you’re supposed to about running your retail business?
A client was in our offices the other day, discussing the quarterly results of his business. The client was thrilled to see black ink at the bottom of his income statement, and he casually remarked, “Guess we’ll finally be able to pay out some bonuses.”
Whoa! Cash is not the same as profit. If our retailer friend had a better understanding of the difference between cash and profits as well as a better understanding of items like current liabilities and notes payable, he would see that although he showed a profit, his bonus checks might bounce.
Understanding the financial limits of your store, and realizing its full potential, must begin with a good understanding of basic retail terminology. For many of us, it IS like learning another language, the language of retail business, what we call “Banker-ese.”
These “language lessons” will be simple, straightforward and to the point. We will address “Banker-ese” terms and concepts in alphabetical order; this article deals with thirteen of them.
The retailers in this article are fictitious, but you may recognize many of the situations we describe. We encourage you to save this set of definitions, perhaps passing them on to others in your store. And, as with any good learning experience, make an effort to apply your new understanding of these terms every time you come across them.
1. Irving Surviving set out one brisk morning to pick up the “I. M. Surviving (?!) Company” t-shirts he had ordered for his sales contest. When he got to the neighborhood t-shirt shop, he discovered he had left the company check back at the store. “No problem,” the t-shirt shop owner said. “You’re a local business. Here’s the bill; just stick a check in the mail.” I. M. Surviving (?!) Co. just had acquired an Account Payable to the t-shirt shop.
Account Payable: A liability to a creditor, or what you owe to someone. Your accounts payable usually consist of your open accounts with your vendors—what you still owe for purchases of goods and services.
2. Remember the t-shirt shop from above? It now has an Account Receivable from I. M. Surviving (?!) Co. The t-shirt shop will be receiving money from Irving Surviving (if all goes well!)
Account Receivable: An amount due to you (that’s where the word “receivable” comes from), usually for sale of goods or services. Accounts Receivables generally don’t include deposits you’ve paid which may be refunded or accruals of other types. For example, if you’ve consistently overpaid on your payroll tax, this does not become an Account Receivable. Credit you grant your customers for purchase of merchandise does create an Account Receivable. See Allowance for Bad Debt.
3. John runs his business the best way he knows how (this is not to assume it is the best way for his store.) For John, that means counting his eggs as soon as the chicken lays them, whether or not he has actually seen the hatched chicks. In other words, John counts his money as soon as a sale is rung up. If he does this, however, the law also requires that John count his expenses as they are incurred, even if he has not paid for them yet. John’s sales and expenses are counted as they accrue.
Accrual Basis of Accounting: This method of accounting reports revenue (sales) and expenses on your income statement for the period in which they are earned or incurred, regardless of when the cash actually is received in or paid out. See Cash Basis of Accounting.
4. Frances gives her full-time employees two weeks annual paid vacation. All employees but one have used up their vacation benefit for the year. Frances knows that although she has not yet paid out the vacation pay to the remaining employee, the expense is still accruing on her books.
Accrued Expense: An expense which has been incurred (for which you are obligated) but which has not yet been paid.
5. Joseph’s face was long as he walked out of his banker’s office. His banker had given him two specific directives if he wished to expand his line of credit: reduce his inventory and cut his administrative expenses. Joseph knew how to fix up his inventory, but he groaned to think of cutting his administrative expenses. Only yesterday, he had proposed increased wages and benefits and the use of an outside bookkeeping service.
Administrative Expenses: Officers’ salaries, wages and benefits, professional fees, office supplies, vehicles and all other general and administrative expenses (sometimes called G & A expenses).
6. Henry reviewed his Accounts Receivable aging reports for the last six months, mentally estimating what percentage of his accounts were long overdue. He then applied that rough percentage to his current Accounts Receivable to arrive at an Allowance for Bad Debt.
Allowance for Bad Debt (also Uncollectible Accounts, etc.): An estimate of your uncollectible (for whatever reason) accounts receivable, entered on your Balance Sheet to help determine the true value of your accounts receivable.
7. Penny grinned as she hung up her coat. She had just come from the computer store, where she had bought a brand new computer. What fun! She busily started rearranging her office to accommodate the addition and notified her bookkeeping office that she would be placing the new asset into service immediately.
Asset: Any physical object (tangible asset) or right in something (intangible asset) owned by you, having a money value. Your assets are grouped and listed on your balance sheet and are usually shown at their total cost or at cost less depreciation for wear and tear. See also Goodwill.
8. Joan squirmed in her seat as the loan officer scrutinized her Balance Sheet. After what seemed like an interminable length of time, the banker set the paper on the desk and said, “Looks good, Joan. You’ve certainly improved the strength of your company since last quarter. I think we can help you this time.” Joan breathed a sigh of relief—carefully monitoring her assets and liabilities had paid off.
Balance Sheet: This is your basic statement of financial position, showing at one particular moment in time the value of your assets, the amount of your liabilities and the total ownership equity in the business. The Balance Sheet is structured around the formula: “Assets equal Liabilities plus Net Worth (or Equity).” Analysis of the various parts of your balance sheet (and comparison to historical and industry balance sheets) can yield valuable information on your company’s strengths, weaknesses, and potential problem areas.
9. Well, here it was, mid-February, and Matthew had been told in no uncertain terms that his B.O.M. Inventory was to be at minimum levels. Now, Matthew had heard a lot of terms related to inventory, but B.O.M. was not one of them. Fortunately, at the end of February, his boss made another reference to it, saying, “How are you doing on your inventory? I want it fixed by the first day of the month!” Matthew held a hasty sale.
B.O.M. Inventory: Beginning of the Month Inventory.
10. Mary likes to run a simple business. No accounts payable, no accounts receivable. “Cash in” is revenue; “cash out” is expense. Mary likes everything to be on a cash basis.
Cash Basis of Accounting: This method of accounting records revenue (sales) as it is collected, and expenses (bills of all kinds) only as they are paid. Note: You may use either the Accrual Basis or Cash Basis of Accounting to run your business, but never parts of both.
11. Joanne is a bit worried these days. She knows she’s had an increase in sales for the last two months, her margins are high, and her inventory (finally) is in line. So why can’t the company stay current with its suppliers? Joanne’s plight is common to us all—she needs to do a little cash flow planning. To help manage her company’s cash, Joanne should sit down and plot out when the money from her receivables and other sales is expected in, and when the money for suppliers and other expenses is due to go out.
Cash Flow Statement: A statement of your cash in (receipts) and cash out (disbursements) over a particular period of any length of time. You can do a cash flow statement for a week or a year, on a scratch pad or a computer spreadsheet. The Cash Flow Statement gives you critical information that will help you make better business decisions.
12. Chris recently purchased a few items from an out-of-state supplier for a trial run. They’d never stocked this item before, but were delighted to see that response to it was favorable. At the end of May, their inventory was $500. They decided to purchase $3,000 more in the new item and held a special sale the following month. At the end of June, their original inventory was down to $650! Chris’s Cost of Sales for the month of June was $2,850.
Cost of Sales: Also known as Cost of Goods Sold, Gross Cost Of Merchandise Sold, Total Merchandise Costs, etc., this is your beginning (B.O.M.) inventory, plus purchases at cost, minus the closing or end of-month (E.O.M.) inventory at cost. It may or may not be net of cash discounts, freight, alterations, workroom costs, etc. The Cost of Sales is subtracted from Sales (at retail) to arrive at a very key number for your business: Gross Margin.
13. Fran recently entered into a three-year lease/purchase agreement for a new computer. On her balance sheet, she placed the current portion of the debt (the first year’s payments) under Current Liabilities, placing the remainder under Long-Term Liabilities.
Current Portion—Long-Term Debt: The portion of overall long-term money owed which is due within one year of the date of your Balance Sheet.
Okay, that’s the end of this first lesson in “Banker-ese.” There are two more sections to follow – Part 2, C–M and Part 3, N–W – which will take you through the retail financial alphabet. Remember to keep looking for opportunities to practice using these new terms; you’ll be speaking “conversational banker-ese” in no time!