Basic Bookkeeping

Q: My degree in art history is useful in selecting merchandise for my poster shop, but I have no idea how to read financial statements. I'm too embarrassed to tell my accountant. What should I do?

A: You don't need to know a lot to understand financial statements, but it's dangerous not to have any idea what they contain. My courses in Scandinavian Studies didn't cover double entry bookkeeping either, but it's not too late to learn, either on your own or by taking a course. You might even find a tutor at your accountant's office.

As the business owner, you need to take full responsibility for the store's tax and loan liabilities. You'll also find some useful tools in financial reports for making more effective decisions about inventory levels or setting an advertising budget.

Most bookkeeping programs generate monthly, quarterly and annual reports automatically. If you don't do your own bookkeeping, consider shadowing the person who does for a few days. Financial reports are only as good as the figures going into them, and your understanding of the reports will be greatly enhanced by knowing where the numbers come from.

The two reports used to gauge the health of a retail business are the Profit & Loss Statement (P&L) and the Balance Sheet. A P&L reviews the business during a one-month period. The first section lists income, broken down into whatever categories you've set up. For instance, if you sell both posters and frames, you should list these sales separately so you can track each category. Categories with increasing sales deserve increased inventory dollars.

The second part of a P&L lists expenses, including merchandise purchases and operating expenses such as rent, payroll, advertising, bank fees, supplies, and taxes. Each monthly P&L report will show whether income has exceeded expenses, in which case you have a profit; or if expenses exceed income, in which case there's a loss.

The problem with the P&L is that retailing doesn't often fall neatly into one-month increments. You might pay for an entire year's insurance during February, or have few purchases in December when sales are high. It's only when you put together a year's worth of P&L statements that you really know how your business is doing.

And once you've been in business for a year or more, you can compare figures month-by-month with the previous year, trying to increase profits through higher sales and/or lower expenses.

The Balance Sheet is usually done quarterly. This report is a snapshot of the financial status of your business. The first part is a listing of the store's assets: cash, equipment, leasehold improvements, and inventory.

The value of your inventory should be determined by a physical inventory at least once a year. The rest of the year you can create an approximation by adding merchandise purchases and subtracting the cost of goods sold (COGS), based on your average markup (taking markdowns into account), and is adjusted for after the next physical inventory.

The second part of a Balance Sheet lists liabilities, including invoices and taxes not yet paid, and any short- or long-term loans. If the total of assets is greater than the total of the liabilities, the remainder is your equity in the business. The final line on the Balance Sheet shows that adding the equity and liabilities together equals the assets.

The main use of the Balance Sheet is to determine the business's financial health. If you want to borrow more money, for example, you'll need to show that you don't owe more than your assets warrant.

But having a healthy Balance Sheet may not mean you have cash on hand. Remember that while inventory dollars count equally to the dollars in your checking account, they don't pay the bills.

Q: It's really hard for me to discipline employees, but I know that if I don't say something soon about Josie's chronic lateness, my other employees will mutiny. How can someone who is confrontation-averse still maintain a tight ship?

A: No one enjoys this aspect of personnel management, but you're not doing anyone a favor by not holding Josie to her responsibilities. Tardiness has a negative impact on both customer service and staff morale.

Here are a few tips to make the necessary conference more tolerable:

• Arrange to talk in private (or with a senior staff member present), not in front of customers or other sales staff.
• Criticize the behavior, not the employee.
• Plan ahead, so that you arrive with specific behavioral changes in mind.

The purpose of the conference should be to correct the problem so that the employee can continue to work for you. However, actions such as theft and abuse warrant immediate dismissal.

At Orange Tree Imports, we use an Agreement for Job Performance Improvement form. On this form, I can fill in a description of the situation in advance of the conference. I then allow the employee to suggest improvements. After agreeing on a timetable for improvement, we arrange to meet again at a later date to assess progress.

Unfortunately, employees can't or won't always change their behavior. Therefore, it's a good idea for both you and the employee to sign this agreement at the end of the conference. Give a copy to the employee, and keep one in her personnel file so you have a paper trail should the problem lead to dismissal.