The Year-End Paradox for Retail
December 1, 2016 | 3 min to read
At the end of every year, the conversation during the weekly meetings turns to the need for a continuation of driving sales to finish the year on a high note. Management constantly reminds us we are competing for the dollar as consumers shop for holiday gifts. No mention is made of year-end results in terms of how the produce department accounts for its yearly report. In most cases, management plans to have made its yearly goals by the end of the next-to-last period. Management makes no mention of the need for proper accounting throughout the year as a key part of ending the year on a strong note. In this area, many once again prove they just don’t get it.
The one particular area generally ignored is the truthful and accurate accounting of inventory at the end of each period. Far too many times produce department managers will postpone recording certain elements of inventory — especially cost items — throughout the year so they can make their profit goals for each accounting period. This helps them progress toward their overall profit goal for the year, which generates their bonus. By postponing these costs, managers can reach their profit targets for each period.
“Far too many times produce department managers will postpone recording certain elements of inventory — especially cost items — throughout the year so they can make their profit goals for each accounting period.”
This builds up a surplus and the momentum to allow them to reach their yearly profit goals before year-end. This practice has been going on for a long time. In terms of profits, this type of “Chinese bookkeeping” projects a false picture of profitability that doesn’t really exist. It leaves produce management to believe that the profit results of each of the accounting periods are better than they actually are. Postponing recording certain costs results in a false sense of security. Sometimes it works and sometimes it doesn’t; and that is where the problem lies.
In the last accounting period, produce managers who postpone recording certain costs end up writing off all costs that had been carried throughout the year. This results in an underperforming period of results and is often overlooked and blamed on unnecessary shrink or other factors caused by the holidays. Instead of actually knowing the true results of each period, we are provided with a “rosy” picture of the actual performance. Since most retailers use a 13 four-week period calendar, the monthly profit picture is not accurate and may show better results than were actually achieved. This does not portray an actual picture of the strengths or weaknesses of an operation throughout each month of the year.
The danger in using this type of accounting is at the end of the year there are two outcomes. First, this accounting “shell game” works out and the total year’s goal of profitability is met, as it was falsely reported and generated through 12 of the 13 accounting periods. Therefore, the less unacceptable results in the 13th period don’t affect overall profitability goals and bonuses. The second outcome is postponing these costs creates a loss in the last period which reduces the profit below the goal, thus affecting bonuses. Management, when asked why this happened, is at a loss and generally blames it on high shrink or other causes. In this scenario, a successful year suddenly becomes an unsuccessful one because of this negligent practice.
To avoid this ongoing “sham” of periodic results requires management to perform proper accounting for every cost incurred in a particular period. This provides not only an accurate picture of the progression, but the amount of profitability generated. There is no guesswork and there is no unnecessary “dumping” of excessive costs into the final period of the year. It provides everyone involved — from department level to management — an accurate picture of what is really happening within the operation, from the sales line to the profit line. To gain this advantage requires discipline in terms of training produce department managers to account correctly in all aspects of their operation and conduct follow-up “spot” reviews of each department’s books. Though it is a little extra work for the management group, following this protocol provides a much clearer picture of what is actually happening in the field and alleviates any anxiety or stress over what might happen in the 13th period. This makes for a far more pleasant ending to the year.
Don Harris is a 41-year veteran of the produce industry, with most of that time spent in retail. He worked in every aspect of the industry, from “field-to-fork” in both the conventional and organic arenas. Harris is presently consulting and is director of produce for the Chicago-based food charity organization, Feeding America. Comments can be directed to
[email protected].
Article 17 of 20
Have a story to share?
Take a place at Produce Business