The Year-End Paradox for Retail

Don Harris - Retail Perspective

Don Harris - Retail PerspectiveAt 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