Procedural Review Audits Can Uncover Hidden Loss

So how can retailers uncover these losses, which are largely invisible? First off, procedural review audits (PRAs) help loss prevention professionals assess the areas of greatest risk and loss, enabling them to prioritize where limited resources should be directed. Audits are commonly used in retail to evaluate compliance with regulations and ensure best practices are implemented. A procedural review audit is similar, but when applied to loss prevention, can be structured specifically to identify areas of risk and point toward root causes. This enables management to effectively measure consistency, while pinpointing operational and loss prevention challenges. With a focused effort on a few common areas in which hidden loss may result, prevention may prevail.

The Checkout Line

A poorly managed checkout line can be hazardous to your store’s health. A long, slow line quickly yields unhappy customers who may drop their merchandise and leave. Time is precious and customers may decide they don’t need the merchandise that badly, or are simply unwilling to waste more time in line. Checkout lines can be especially irritating to customers if they spot seemingly idle employees in the store. Retailers should know how to avoid checkout bottlenecks, enlisting store managers, idle employees, or anyone who is available to assist at the point of sale. Even if employees are restricted from operating registers, they can still move things along by bagging merchandise or removing EAS tags. Unannounced PRAs help retailers determine if staff is doing everything they can to assist customers when the need is greatest. PRAs can focus on assessing training to ensure all employees know how to conduct critical tasks, such as exchanges or price overrides at the checkout line. They can also help assess if the culture is focused around putting the customer first.

The Aisles

A hollow “Can I help you?” or no greeting at all means little to a customer. How often do customers give clear, unmistakable signals that they are looking for something they can’t find, but associates are too busy performing administrative tasks behind a counter? Providing true customer service requires employees to go the extra mile. It may mean calling another store to see if they have the merchandise in the size needed, checking inventory in the back room, or escorting the customer to another part of the store. Is it convenient for the employee? No. Is it critical to avoiding lost sales? Yes. Unannounced PRAs or PRAs conducted by mystery shoppers can screen to see if customer service processes are being implemented throughout the retail environment.

The Shelf

One of the most significant causes of lost sales is simply merchandise missing from store shelves. This is particularly common with quick-turn merchandise, consumables and clothing. If customers can’t find what they are looking for, they will usually assume the retailer has run out and will go to another store to find it. All the while, the desired goods are likely sitting in inventory, causing a lost sale. PRAs are ideal for monitoring operational processes and ensuring that stores are consistently implementing best practices to regularly check and stock shelves. PRAs can further help retailers identify the areas that are at greatest risk for out-of-stocks, and ensure they receive special attention.

These simple steps can make a huge difference in making sure customers get what they came for and actually complete their transactions. By minimizing lost sales due to poor processes and customer service, retailers can better mitigate the risks of unseen and undetected losses.

Andrew Wren serves as CEO of Wren Solutions, a loss-prevention technology provider helping LP professionals reduce loss, increase profits and rise as heroes in their companies.

1) How did the past year’s sales compare with sales in the past three to five years? If your business has a history, use the archived statistics to your advantage. Look for trends within your sales performance. Hoagland-Smith emphasizes, “You can predict, based on the analysis, what will happen in the future.”

2) How did the past year’s profits compare with profits in the last three to five years? When measuring profitability, add up revenues and then subtract expenditures. Every little bit counts, and if you are saving/earning a little more each day, week, month or year, you are making a profit. Profitability is the key to sustainability.

3) Did your business meet its goals? While most retailers share a similar goal in making a profit and increasing customer traffic, each store owner may have a list of goals they were hoping to meet and exceed for the year. These goals could be in sales, marketing, management, or finances. Meeting goals shows determination, innovation, and makes next year’s goals that much easier to attain. If you haven’t made goals in years past, consider this an opportunity to start your success off on the right track.

4) Are repeat sales up, down or flat? Remember, the target is not only new customers, but loyal customers who continue to add to your bottom line and provide free marketing through recommendations. Hoagland-Smith mentions, “Encouraging repeat business increases profitability, because you don’t have to spend to bring in new customers.”

5) Is overall equity up, down or constant? While your business may seem like your life, as you continually pour your blood, sweat and tears into it, the real value can’t be determined by sentiment. Looking over balance statements and considering items such as the property’s worth, sales figures and the current customer base may help give a more accurate perspective. However, as time is critical in the retail industry and you have products to purchase, inventory to check and your first sale to plan, there are three simple considerations to help you better understand the business numbers, and grow profits in the upcoming year.

First, think of expenditures as assets, and not always as a negative. It can be beneficial to cut out expenses, but not if that expense helps improve your efficiency, build future revenue, or is enhancing your business as a whole. Second, create a smart budget that tells you how much you can afford. If you don’t spend all the budgeted money, you haven’t necessarily done something wrong. Any penny saved may help out with those unexpected seasonal expenses (i.e., energy in the winter or tax season accounting). Lastly, recognize the strategies that work, but more importantly, abandon those that don’t. As Intuit Blogger, Peter Vessenes, writes, “Especially for newer businesses, some strategies will inevitably go awry. A failed strategy does not have to mean a failed business, as long as you know when to pivot or pull out.”

Sales planning, projecting, forecasting or whatever label you wish to assign to it, needs to be done at the classification level and not by brand. Most independents almost always want to plan for an increase in business, whether warranted or not. An unrealistic sales forecast will generally lead to an overbought situation, which in turn will lead to increased markdowns at best, and decreased turn and cash flow at worst. Classifications get planned up based on profitable sales and trends, and down when the reverse happens. Merchandise planning that originates at the class level and rolls up to the department and then store level is referred to as bottom-up planning, as opposed to top down planning, which emanates from a total company plan and works its way down to the class level.

Planning the needed stock level to support the sales plan is the next phase. This is accomplished by the use of stock/sales ratios. A stock/sales ratio is simply the relationship between stock and sales. It is related to the turnover and the proper timing of deliveries. Stock/sales ratios are different for each classification and for every month. This is perhaps the single most compelling reason for automating the planning process. For example, a classification that is planned to turn three times would have a stock/sales ratio of 4. This can also be viewed as a number of months of supply to have in stock. (12 months/3 turns = 4 months of supply). If a classification holds more than it can sell for a given period of time, the stock/sales ratio increases, and over time, turnover will decrease. In severe examples, this can lead to higher markdowns than usual, reduced margins and an overall reduction in gross margin return on inventory (GMROI) as well.

Suffice to say, getting the inventory planned correctly is vital. When using the retail method of accounting, as we are assuming in this discussion, stocks are planned at the current retail value. This means that markdowns are recognized when they are taken, as opposed to when the merchandise is actually sold. This reduces the “market” value of the inventory by the amount of the markdown, which increases turnover and generates additional OTB dollars to land new merchandise. Some systems do a much better job at handling this than others; you can trust me on that.

Sales and inventory forecasting are the two most important elements in the creation of an OTB plan. If errors are made in either of these areas, the OTB plan is going to be wrong. Results of poor OTB planning or no planning can be quite costly, and generally lead to inventories that are out of balance. Under planned classifications lead to lost sales, while over planned categories typically end up less profitable due to markdowns and slower turnover. Attention also needs to be given to reporting accuracy, since inventory variance can substantially alter the merchandise plan. The capture of markdowns and transfer reporting is a good first place to look if you encounter an inventory variance that is outside of industry norms. Not using an open-to-buy plan is like driving a car without insurance or building a house without a blueprint. It is dangerous and sometimes the outcome can be disastrous.

Ritchie Sayner is Vice President of Business Development for RMSA Retail Solutions

Preparing for the New Season: Best Selling Merchandise and a Better Understanding of Delivery Dates

But before jumping ahead, running a vendor profitability report is the first step to preparing for any new season. You will want this report to rank the vendors in each classification (category in which inventory data is organized and analyzed), according to sales volume, maintained margin and turnover or sell through. If your POS system does not have a report similar to this, request it. It is perhaps the most important report you can run. This exercise will be very eye opening and may provide the ammunition needed for future vendor negotiations. You should als be able to run a similar report for sizes, colors and price points. Divide your open-to-buy (OTB, a financial budget for retail merchandising) dollars by allocating them to top vendors you think you will be using in each classification, being sure to leave uncommitted OTB dollars for reorders, fill-ins, new vendors and promotional merchandise. Once this exercise is complete you are ready to tackle the timing issue.

Building orders and planning delivery dates is an essential component to a sound merchandise plan. Let’s consider women’s sandals as an example. A typical selling season is February through June. March, April and May represent the heart of the cycle, with sales usually peaking in April depending on weather and location. February and June are referred to as “shoulder” months. In February, stores normally start building sandal inventory levels for the spring season. This year, due to an unseasonably mild winter, some stores have moved sandal deliveries up earlier to attract the fashion conscious consumer who buys early in the season when new offerings are first presented. Just because the calendar says it’s January, doesn’t mean people aren’t thinking about spring. Fresh new merchandise that has recently arrived, provides a welcome relief to the frequent shopper who has been inundated with aggressive promotional markdown on last season’s boots for the past several weeks. June is typically a clearance month for sandals even though “in-season” markdowns probably will be implemented much earlier on poor performing styles. Final markdowns are typically made in late summer, although this past year several stores experienced good sandal sales much longer due to warm fall temperatures in a large part of the country.

Remember that your customers like to see new merchandise just as much as your sales people enjoy selling it, which means you need a fresh flow of merchandise arriving throughout the season. Many retailers have a habit of front loading, or landing most of the merchandise early in the season. The store may look great early on, but it can look equally as bad as the season matures with less desirable sizes on key styles dominating the assortment mix. Stores that front load often commit so much of the OTB to early shipments that cash is not readily available for size fill-ins and off-price opportunities that may exist at the season’s end. This practice slows inventory turnover, interrupts cash flow, and potentially restricts volume growth.

Many vendors offer price advantages or extra dating if you permit them to land merchandise early. This approach often backfires because the merchandise is picked over before the season begins. Moreover, the sales associates are tired of the merchandise before the season arrives. Another point to be made against getting the majority of the inventory at the beginning of the season is that if business does not pan out as planned you already have an entire season’s worth of stock. Had you written back up orders on key styles, you would have had much more flexibility in modifying or even canceling as a last resort.

Just as landing merchandise too early can be dangerous, so is landing it too late. Landing merchandise too late could be inviting markdowns because there is too little time remaining in the season to sell the goods at full price. This is the major reason why an in-store completion or cancellation date should be used on every order.

The final key to scheduling ideal delivery dates lives in he open-to-buy. Your OTB should reflect planned receipts by month, over the course of the season. Once you receive your monthly OTB, you can then create a percentage of planned receipts per month, instead of a lump sum amount. Your monthly OTB will reflect current trends and consumer buying patters as they unfold over the course of the season. An additional benefit is that your accounts payable will be easier to deal with, and our cash flow will better mirror your expenditures. Think in terms of several small invoices as opposed to fewer large ones. By following thse simple steps you will have a clear picture of how receipts should flow. The closer you adhere to planned delivery dates, the better your business will perform.

To discuss your store’s inventory timing contact Ritchie Sayner. Ritchie Sayner is Vice President of Business Development for RMSA Retail Solutions. Ritchie Sayner is Vice President of Business Development for RMSA Retail Solutions. Contact Mr. Sayner at rsayner@rmsa.com or 816-505-7912.Sayner at rsayner@rmsa.com or 816-505-7912.

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Common Areas for Hidden Loss in Your Retail Store

A focused effort on a few common areas in which hidden loss may result:

The Checkout Line

A poorly managed checkout line can be hazardous to your health. A long, slow line quickly yields unhappy customers who may drop their merchandise and walk out of the store. Time is precious and customers may decide they don’t “need” the merchandise that badly or are simply unwilling to waste more time in line. Checkout lines can be especially angering to customers if they spot seemingly-idle employees in the store. This is no epiphany. Retailers know how to avoid checkout bottlenecks: all hands on deck! Enlist store managers, idle employees, anyone who is available to assist at the point of sale. Even if employees are restricted from operating registers, they can still move things along by helping to bag merchandise, manage the line, or remove EAS tags.

The Aisles

A hollow “Can I help you?” or no greeting at all means little to a customer. How often do customers give clear, unmistakable signals that they are looking for something they can’t find, but associates are too busy performing administrative tasks behind a counter? Providing true customer service requires employees to go the extra mile. It may mean calling another store to see if they have the merchandise in the size needed, going to check inventory in the back room, or escorting the customer to another part of the store. Is it convenient for the employee? No. Is it critical to avoiding lost sales? Yes.

The Shelf

One of the most significant causes of lost sales is simply merchandise missing from store shelves. This is particularly common with quick-turn merchandise, consumables and clothing. If customers can’t find what they are looking for, they will usually assume the retailer has run out and will go to another store to find it. All the while, the desired goods are likely sitting in inventory, causing a lost sale.

These simple steps can make a huge difference in ensuring that customers get what they came for and actually complete their transactions. Check out Independent Retailer magazine’s upcoming February issue for a more in-depth explanation on how Procedural Review Audits can help in these common areas to reduce or prevent hidden loss. By minimizing lost sales due to poor processes and customer service, retailers can better mitigate the risks of unseen and undetected losses.

Andrew Wren serves as chief executive officer of Wren Solutions, a loss-prevention technology provider helping leading retailers reduce loss and increase profits. Wren is responsible for corporate and product strategy, leveraging his more than two decades of security technology expertise. To learn more about Wren’s solutions, visit www.wrensolutions.com.

Making resolutions for the upcoming year is a time honored tradition with roots tracing back to Babylonian times.  In 153 BC, Janus, the mythical King of early Rome was placed at the head of the calendar. Janus was always depicted with two faces, one looking back on past events, the other forward to the future. The early Christians believed the first day of the year should be spent reflecting on past mistakes and resolving to improve oneself in the coming year. Today, many people look at the New Year as a chance to start over, to rid themselves of bad habits and take on a fresh, positive way of life. Hence the modern day New Year’s resolution that generally encompasses everything from self improvement to improved finances.

As you reflect professionally on the past year and look forward to the next, take time to recognize past accomplishments that had a positive impact on your business.  As you consider areas you would like to improve on for the upcoming year, focus on goals, objectives and initiatives that are attainable and realistic. I want to avoid offering up a smorgasbord of suggestions that would most likely be forgotten as quickly as last season’s markdowns. However, here is one resolution that every merchant should make each and every year.

Resolve to: Sell more merchandise more quickly!

That’s it! Resolution making, at least from a business standpoint, is over. Here’s why.  Selling more of your inventory more quickly achieves a multitude of favorable results.  First, you have resolved to have a sales increase. This increase will be driven not by profit-stealing markdowns of old goods, but by fresh new products, which by now we all should recognize is the catalyst to increased revenue.  Second, we have resolved to sell said products more quickly, which translates into faster inventory turnover. Supporting this resolution is accurate open-to-buy planning by store and classification, properly timed deliveries, identification of hot selling items for timely reorders when possible, and dealing with slow selling inventory through stock balancing or in-season markdowns as soon as problems arise.

Added byproducts to increased sales and faster turnover are better margins, stronger cash flow, reduced operating expenses as a percentage of sales, and an elevated Gross margin return on investment (GMROI). Gross margin is enhanced for the simple reason that the newer the products, the greater likelihood of the product selling at full price. Every retailer should be cognizant of the fact that new goods, timed properly have the best chance of selling quickly.  Allow me to explain turnover in the simplest way possible: preferred several small invoices for deliveries on a consistent basis versus a few large ones due all at once. If you can accomplish this, turnover can be improved, providing you are not a chronic over buyer due to poor inventory planning, lack of discipline, or both. Operating expenses are expressed as a percentage of sales. When sales go up, operating expense percentage goes down, and net profit goes up. GMROI increases due to additional gross margin dollars being generated through more profitable sales along with a lower average cost inventory. Simple arithmetic.

Just as the early Romans approached each new calendar cycle by looking both backwards and forwards, if we embrace the benefits gained through retrospect to help guide our future path, we will be better prepared to receive the challenges of the coming retail year.

Here’s wishing you a Happy, Healthy and Prosperous New Year!

Ritchie Sayner is Vice President of Business Development for RMSA Retail Solutions. Ritchie Sayner is Vice President of Business Development for RMSA Retail Solutions. Contact Mr. Sayner at rsayner@rmsa.com or 816-505-7912.Sayner at rsayner@rmsa.com or 816-505-7912.

Retail Sectors Evolve to Fill Vacancies and Boost Sales

One of the latest trends increasing in prominence, as reported by FleaMarketZone.com, is the temporary flea market, also known as a Pop-Up Flea. The Pop-Up method is appealing to property owners because it puts unoccupied space to good use and attracts traffic between renters, while giving vendors an opportunity to sell their wares in a new and exciting setting.

However, most property management is looking for more than a temporary fix, forcing them to renegotiate leases (whether it be in cost or term) and entertain the thought of some unconventional tenants. As Greg Maloney, president and CEO of Jones Lang LaSalle Retail, explains to USA Today, “We’re taking a look at anything to generate traffic,” which includes those mom and pops and indie stores more commonly found on Main Street USA. While such tenants may seem out of character, they are undoubtedly welcomed as vacancy becomes a matter of mall survival.

To adapt to a fragile economy and fickle shopping habits, sectors within the retail industry have found a way to work together. It isn’t just flea market vendors occupying indoor retail space, or independent retailers moving from their brick and mortars downtown to high traffic malls that are redefining retail. Joining in on the retail evolution are outlet centers. While the recession made bargain prices for name brands an opportunity for growth in this retail sector, the outlets’ popularity creates hope for other retail avenues.

For instance, International Outlet Journal reports, “Outlet tenancy has been planned for years at Pyramid Company’s thriving mall (Carousel Center/Destiny USA) in Syracuse, NY. The 850,000 square foot expansion of the 2.4 million square foot center will be tenanted by both traditional outlets and luxury chains.” Marshal Cohen, chief industry analyst at NPD, says it best, “There’s no question that what we’re witnessing is the transformation of how and where consumers are shopping,” as he comments on the growth of outlets and consumers demand for value. But for projects like Destiny USA, it is more than a variety of products and the addition of good-value pricing that draws consumers. With an anticipated 29 million shoppers, retail has obviously begun to promise a certain level of entertainment. “The Pyramid crew expects Destiny USA to become an itinerary add-on for U.S. and Canadian visitors heading to New York’s Finger Lakes and Adirondacks regions, and for overseas travelers to New York City,” notes the International Outlet Journal.

Most retailers take a physical inventory in conjunction with their fiscal year end.  Certainly this is a recommended practice from an accounting perspective.  From an operations standpoint, the benefits of a clean and thorough physical inventory are numerous. If for example, a physical count is taken once a year and the inventory levels in the computer are adjusted and “cleaned up” to reflect the recent count, logically speaking, there will be no time in the year when the inventory reports will ever be more accurate and up to date. One of the more significant reports to generate after the inventory is reconciled is the inventory variance report. Most POS systems have one. This report reveals the differences between the book and physical inventory.  Book inventory is what the computer says you have on a given date and physical inventory being what you just counted and actually have in the store.

In my dealings with independent merchants over the better part of the past three decades, I have found that most stores assume a very casual approach to inventory adjustment.  This runs the gambit from the nonchalant retailer who merely accepts the difference and moves on (what I refer to as the “oh well, it is what it is” approach), to the operation that looks into every missing sku in an effort to tighten up the operation and prevent further discrepancies.

Analyzing Inventory Variance

Book and physical inventory should be monitored at the store and classification level.  Several things can cause a disparity between these numbers. Markdowns that were not properly recorded are a potential problem area to check into, assuming the store is operating under the retail method and markdowns are kept track of. Transfers between stores are where a multitude of problems tend to occur as well.  It is not uncommon to find one store showing shrinkage and another store coming up with an overage by the same amount.  The solution here is an obvious one: tighten up the transfer process. Discrepancies can also arise from goods being received into the wrong classifications when the merchandise arrives.  If purchase orders are filled out properly with correct department/class information, this too can be held to a minimum going forward.  Missing tickets and human error at the point of checkout is another cause of inventory variance.  I am continually reviewing classification information from independent shoe merchants and almost always see a class described as “unknown” or “missing.”  I have seen extreme examples where sales in these classes can be some of the highest volume classes in the store.  Needless to say, there shouldn’t even be a classification in the store to track unknown or missing merchandise. In order to keep the merchandising information credible all sales must be put into a classification when sold.

Another area for shrinkage is theft, both internal and external.  Having said that, I can almost assure you that I will get emails from merchants who will claim they have never heard of this happening in their stores.  Remember, just because you aren’t aware of something doesn’t mean that it hasn’t or can’t happen.  There isn’t a retailer on the planet that hasn’t had some experience with theft with the possible exception of the new store that has been just open for one day and frankly, I wouldn’t bet on that scenario.

A respectable shrinkage goal would be anything less than two percent. Inventory shrinkage is a component of cost of goods sold along with purchases, freight in, alterations, trade discounts earned and the difference between beginning and ending inventory.  So, if a store’s year-end shrinkage is high, the COGS will be higher and the gross margin will be reduced accordingly.  Recently, I have suggested that several of my own clients begin using inventory shrinkage as one of the components of manager bonus programs in an effort to illuminate the importance of closely monitoring this area of potential loss. In severe cases, inventory shrinkage can alter open-to-buy numbers thereby creating a potential shortage of inventory, which could lead to missed sales.

As you embark on the year-end introspective ritual of looking for areas of improvement, don’t overlook inventory variance. It just might be the difference between being profitable and being very profitable.

Ritchie Sayner is Vice President of Business Development for RMSA Retail Solutions. Ritchie Sayner is Vice President of Business Development for RMSA Retail Solutions. Contact Mr. Sayner at rsayner@rmsa.com or 816-505-7912.Sayner at rsayner@rmsa.com or 816-505-7912.

Questions to Consider

1) How did this year’s sales compare with sales in the past three to five years? If your business has a history, use the archived statistics to your advantage. Look for trends within your sales performance. Hoagland-Smith emphasizes, “You can predict, based on the analysis what will happen in the future.”

2) How did this year’s profits compare with profits in the past three to five years? When measuring profitability, add up revenues and then subtract expenditures. Every little bit counts, and if you are saving/earning a little more each day, week, month or year, you are making a profit. Profitability is the key to sustainability.

3) Did your business meet its goals? While most retailers share a similar goal in making profits and increasing customer traffic, each store owner may have a list of goals they were hoping to meet and exceed for the year. These goals could be in sales, marketing, management, finances and more. Meeting goals shows determination, innovation and makes next year’s goals that much easier to attain. If you haven’t made goals in years past, consider this an opportunity to start your success off on the right track.

4) Are repeat sales up, down or flat? Remember, the target is not only new customers, but loyal customers who continue to add to your bottom line and provide free marketing through recommendation. Hoagland-Smith mentions, “Encouraging repeat business increases profitability because you don’t have to spend profits to bring in new customers.”

5) Is overall equity up, down or constant? While your business may seem like your life, as you continually pour you blood, sweat and tears into it, the real value can’t be determined by sentiment. Looking over balance statements and considering items such as the property’s worth, sales figures and the current customer base may help give a more accurate perspective.

This article has been adapted from a piece on the Intuit Small Business Blog.

Taxing Rules, Regulations and Conditions for the 2012 Tax Season

First, favorable business tax rules may be extended.?While numerous tax rules are set to expire at the end of 2011, they will more than likely be extended, at least through 2012. However, action on extension may not occur until 2012 (i.e., extension will be retroactive to the start of the year). Some of the key provisions include:

1) 100 percent bonus depreciation and up to $500,000 of first-year expensing (the Section 179 deduction).

2) 100 percent exclusion for gain from the sale of qualified small business stock (stock in certain C corporations held more than five years).

3) Research credit.

4) Work opportunity credit for hiring individuals from certain targeted groups (only certain veteran groups are set to apply after 2011).

Other less favorable conditions to expect are unemployment taxes and an increase in tax audits.? Some states borrowed from the federal government to pay for unemployment benefits, but not having repaid the borrowed sums in full has resulted in an unemployment tax for employers in these states. These employers cannot use the full credit state unemployment taxes when figuring their FUTA liability. As for tax audits of businesses, according to one KPMG survey, they are on the rise. Corporate executives who were surveyed reported a 61 percent increase in federal tax disputes; 37 percent reported an increase in state tax audits.

And when it comes time to file, small businesses will not only be following new rules and regulations, but also new filing systems. In fact, filings will be almost exclusively online.? Starting with the 2012 tax season, paid tax return preparers are required to e-file client returns if they expect to file more than 10 forms in the 1040 series and/or 1041 (the income tax form for trusts and estates). E-filing isn’t limited to personal income tax returns.

This piece has been adapted from an article by Small Business Trends, where you can learn more expected trends for the 2012 tax season.