Meat Retailing - A Simple Bookkeeping System
( Originally Published Early 1900's )
The meat retailer who will study the examples of the simple bookkeeping system given in the following pages has no excuse upon which to base his claim that that it will entail intricate bookkeeping methods. By using this system he has the opportunity to record all of his business transactions and therefore arrive at the facts so he can know how much it costs him to do business. With these facts in his possession, he is in position to make a correct selling price.
The great majority of business concerns in this country close their books on a monthly basis. The retail meat business, however, is usually conducted on a weekly basis. Practically all bills are payable weekly, and it has been customary to talk about sales "per week" and profit "per week" in this industry.
For that particular reason, the bookkeeping system illustrated has been laid out upon a weekly basis. The retailer who wants a monthly report will find it comparatively easy to consolidate the weekly reports, add together the totals, and thereby quickly get the results by the month. The same applies to the yearly statement, which can be made up from weekly or monthly statements as may be desired.
In making up a set of books for the retailer, there are three principal basic forms required. The retailer who wants more details and statistics about his business can always extend his bookkeeping system to keep any additional information he may require. The principal object of the bookkeeping system is to get at the principal facts of the business and record them in the simplest possible manner. Accountants will always find it possible to differ on certain matters of details and will vary some-what as to what is best for the meat retailer.
The particular system employed, however, can be varied, extended and altered to suit most any meat market. Forms for making up such a bookkeeping system can be secured from firms specializing in business stationery. A great variety of ruling is available so that no retailer will have difficulty in making up his own set of books, and he can use as many columns as are required. For instance, the retailer who handles canned goods or groceries in addition to his meats will probably want to keep separate accounts, and these can be inserted or added. The same applies to a retailer who wants to keep a record when handling fish, or who may want to keep accounts of separate departments.
Fundamentally the method of bookkeeping illustrated here-with will show :
1. The sales
2. Less cost of goods
3. Leaves gross margin
4. Deduct all expenses
5. Which leaves profit.
This analysis is the fundamental basis of a bookkeeping system and therefore requires the recording of sales, of the cost of the goods, and of all expenses. For that reason the forms required consist of :
Form No. 1 : The Daily Record on a Weekly Basis.
Form No. 2: The Weekly Operating Statement.
Form No. 3: The Weekly Financial Statement.
The Daily Record
The Daily Record is divided into blank columns, each one intended for a different business transaction. Some markets may have expenses coming under different headings. Therefore the bookkeeping system is primarily intended to show the necessary principles of such a system to the retailer. For instance, another column may be added for "advertising" expenses, "taxes, insurance, etc.," providing these items are not already listed under miscellaneous expenses. Again a column may be added for "other income" as it may be possible that the retailer has sub-rented certain space in his store, for instance, to a fruit and vegetable stand. Therefore, the retailer will always find it best to arrange for a simple method of bookkeeping to suit his individual requirements.
Explanation of the Daily Record
Column 1 is for the recording of cash sales. The cash register shows at the end of the business day, the total cash received from sales, in addition to the charge accounts. The charge accounts should be deducted from the total cash received and the result should be entered in Column 1.
Column 2 is for the recording of cash received from charge accounts. Or in other words, the amount received from the customers who pay their bills weekly or monthly.
Column 3 is used for purchases which have been paid for on that day. While the great majority of meat market owners pay their bills on a weekly basis, there are quite a few items which are bought from so-called peddler wagons. While beef is usually not bought that way, bologna, sausage, pork cuts, and other meats are frequently bought for cash, and it is for such purchases that Column 3 is intended. Such buying is found more frequently in larger cities.
Column 4 is to record the wages and salaries and all money Week ending expenditures which come under this classification, with the exception of the proprietor's salary.
Column 5 is used only providing the retailer has a delivery system and is used for wages such as can be classified under the item of delivery, as drivers, delivery boys, etc.
Column 6 is for the recording of all expenses on delivery. Automobile depreciation, gasoline, oil, auto insurance, tires, purchases of delivery equipment and other accessories.
Column 7 is for the recording of rent. Since this daily record is on a weekly basis, it is very easily arrived at by dividing the yearly amount paid for rent by 52 which gives the weekly amount of money paid for rent.
Column 8 is used for the recording of all expenses for refrigeration. This may be for either mechanical refrigeration or for ice. Such expenses are either the actual ice bills or the operating cost of the refrigerating machine, such as ammonia,. oil, water, and repairs. Unless a separate column is kept for power and if no other power machines are in the market, the bill for electric power on the ice machine should also be entered in this column. If other power machines are used, for instance, for the making of sausage or bologna and no separate meter exists showing the amount of power consumed for each department, it becomes difficult to establish a correct cost for operating the refrigerating machine. Unless a separate column is carried for depreciation, it is also well to itemize depreciation on the refrigerating plant under the expense for refrigeration.
Column 9 is used for the recording of light, heat and power. This column of course, can be divided into three different columns, in order to keep a detailed check on the various items.
Column 10 is used for entering expenditures for general supplies such as wrapping paper, twine, wooden dishes, and a great number of other supplies which may come under this heading. This many include for instance, tools, sharpening of tools, grinding of knives and plates. In a small market it is often the custom to include the purchase of and the laundry expenses of butcher's coats and aprons. In a large market where such items run into considerable money it is advisable to set up a separate column for this expense.
Column 11 is one which, again, may be divided into several other columns if the size of the business warrants it. It covers miscellaneous expenses which do not, of course, occur very frequently. For instance, bill heads and stationery, the purchase of additional equipment, liability insurance. This item of insurance, however, is usually kept in a separate column in a larger business as it is a considerable expense item.
Column 12 is for entering the proprietor's salary.
Column 13 has been explained under Column 1. It is merely for charge sales made during the day.
Column 14 is for the recording of all purchases made for meats, which are charged and paid weekly or monthly.
Column 15 is reserved for the retailer who wants to enter his depreciation expense every week.
Column 16 is reserved for the retailer whenever he pays out cash for bills which he owes. He enters these items in Column 16.
The Weekly Operating Statement
As can be seen, the daily record sheet can be made flexible to suit the condition of each individual market and as many columns can be provided as the retailer needs. At the end of each week every column should be added up so that the figures may then be transferred to the weekly operating statement.
Explanation of the Weekly Operating Statement
The weekly operating statement is the retailer's guide to discover whether he is making or losing money and for that reason is very important. Practically all the figures on this statement are transferred from Form No. 1, the Daily Record. When opening up a set of books, however, it is important to see that a correct inventory is taken, including cash on hand, accounts receivable and all liabilities listed., as a basis for future comparison. Thereafter, the figures are simply carried forward from one week to another.
A study of the weekly operating statement shows that it is not complicated and offers no excuse for the retailer to be without such a simple bookkeeping system. The daily record sheet shows exactly what the retailer is paying out. The operating statement shows him the amount of profit or loss and Form 3, the weekly financial statement shows the actual net worth of his business. These three fundamental facts every retailer should know.
Explanation of the Weekly Financial Statement
The weekly financial statement may also be considered a trial balance and proves the correctness provided the total assets always equal the total liabilities. All the figures which should be placed on the financial statement are obtained from Form 1, the daily record and from Form 2, the weekly operating statement. Form 3, the weekly financial statement, will then give the retailer his exact status in business.
The above three forms will give any retailer sufficient facts about his business so that it is an easy matter to arrive at the percentage of his operating expenses. It, therefore, gives the retailer the facts upon which to establish a correct selling price. As an illustration, if the retailer has sold $1,000 world of meats during the week and his total operating expenses are $210.00 for that period, he knows that his operating expenses are 21% on sales. Without having such facts, it is practically impossible to establish a correct selling price.
Explanation of Operating Expenses
There are some items in the various statements which require further explanation in order that the retailer may be thoroughly informed as to the various charges and expenses which are to be recorded.
Expenses in connection with delivery have become a very important factor in the retail meat business. Although there has been a general tendency throughout the country to eliminate the delivering of meats, there are certain markets which find it absolutely necessary to render such service because the trade demands it. Despite the fact that the cash-and-carry store is gaining in favor, there still exists a great number of markets which are practically compelled to deliver meats to their customers.
Every item of expense which pertains to delivery should be charged in this column. The most common expenses are:
1. Auto trucks 6. Gasoline
2. Garage rent 7. Painting of truck
3. Garage labor 8. Depreciation on equipment
4. Tires 9. Liability insurance
5. Oil 10. Fire and theft insurance.
It will be noted that the present day delivery system has a great number of expense items. While the majority of the expenses are direct, there is also an indirect expense which consists of the charge on depreciation.
Depreciation on auto trucks becomes a very important expense item due to the fact that delivery trucks are used very extensively and therefore depreciate rapidly. The owner of a small delivery truck which cost him say $500 may be able to trade it in after one year's use and get a trade allowance of $200, depending upon the condition of the truck. In such a case, the year's depreciation on the truck has been $300 which is equal to a depreciation charge in this instance of $25.00 per month.
Total delivery expenses may vary from 1 1/2% to 6% of the total sales volume. Usually the larger volume of business delivered per truck, the smaller the expense per truck. The following interesting table has been published by K. B. Gardner, Associate Economic Analyst of the United States Department of Agriculture:
Table 26 shows delivery expense on the percentage of the delivery sales and also total delivery expense in percentage of total sales ranging from approximately $5,000 up to $167,000. The total average delivery expenses of this table is 4.2%, figured on the percentage of total sales. Comparing delivery expenses to other operating cost in the retail meat business, with the exception of wages it is comparatively high. It is a well known fact that many retailers do not operate on a margin of profit as high as the total delivery expenses and if this heavy expense could be eliminated, it would add considerably to the profits of the market owner.
Investigations have shown that many retailers who own their store building make the serious mistake of charging only a very small rent for the use of the building they own, or they make no charge. The retailer owning his own property should figure rent on the same basis as if he were renting the store from somebody else. If the market owner did not occupy the store himself he would certainly lease it and receive at least 10% gross return on his investment in the store building.
If correct operating expenses are to be established, such items as ownership should not enter into the matter. If the retailer does not charge sufficient rent according to the above basis, he is not getting at the true facts of his business operating expenses.
This is another very important expense item frequently over-looked by the great majority of retailers. So many smaller retailers operate their business in the belief that the profit they show in the conduct of their business is sufficient compensation for their efforts. Since the item of wages is the heaviest expense in the retail meat business, the retailer who does not charge up his own salary may be operating at a loss. The author has frequently investigated operating conditions in markets and found owners who claimed that they were making good profits, when there was barely enough profit to pay the proprietor's salary.
As an illustration, one owner mentioned that his market, which employed one meat cutter beside himself, was netting approximately $3,000 per year. Further investigation proved that the market owner was not drawing salary for personal services. But he mentioned that he could get a position at any time for $60 a week, as manager of a chain store. When this $60.00 per week or $3,120 per year, was applied against the fictitious profit of $3,000, the business showed a loss of $120.00.
The man who invests thousands of dollars in a market and assumes all the responsibilities in conducting a business establishment, is also entitled to a salary. The profits which he is making above his salary may be termed "business profits," and he is entitled to them for the risk he is taking in investing his money and conducting the business.
Comparatively successful business men who charge them-selves either a salary equal to that of their meat cutters are also doing an injustice to themselves. On account of his business ability, the meat retailer is worth more to the industry than the meat cutter. Modern business bases salaries according to ability and the same retailer could secure a position in a meat market which would give him probably twice the amount of money paid to the average meat cutter. Accordingly he should charge him-self a salary which would bring his wages to a figure equal to his actual worth according to his ability.
A great many retailers claim they operate on a low wage expense of about 8 or 9%, and pride themselves on this fact. These retailers usually overlook including their own salary. If a fair salary were added to the low expense, the total wage expense would be considerably higher. Therefore, the retailer who does not charge a fair salary for his own services, equal to that he would receive in an executive capacity for somebody else, is simply cheating himself.
This same principle applies when members of the retailer's family work in the market. This may be the wife, son or daughter. Very often they receive only very small salaries or none at all, and the retailer who makes up his business operating expenses on such a basis is also making a mistake. He must figure the same basis of compensation for his family that he would have for somebody else performing the same work.
United States Government income tax reports have had a great influence in bringing about the charging of salary on income tax reports and have induced many retailers to keep some records of their business transactions so they are able to make out income tax reports correctly.
Depreciation is another charge in the retail meat business frequently overlooked because it is in reality an indirect expense.
In the past conservative business firms made it a rule to charge off equipment on their books as quickly as possible. While this policy from a business standpoint is extremely conservative, its practice is really illegal. For instance, if a market owner buys a refrigerator for $1,000 and deducts the entire amount from his profits, he will find that in all probability the government income tax authorities will not allow it. The United States Government has laid down certain rules and regulations which define the subject of depreciation clearly. In Article 161 under Depreciation, published in "Regulations 65, Relating to the Income Tax, Under the Revenue Act of 1924," it reads:
"Article 161—DEPRECIATION—A reasonable allowance for the exhaustion, wear and tear, and obsolescence of property used in the trade or business may be deducted from gross income. For convenience such an allowance will usually be referred to as depreciation, excluding from the term any idea of mere reduction in market value not resulting from exhaustion, wear and tear, or obsolescence. The proper allowance for such depreciation of any property used in the trade or business is that amount which should be set aside for the taxable year, in accordance with a reasonably consistent plan (not necessarily at a uniform rate), whereby the aggregate of the amounts so set aside, plus the salvage value, will, at the end of the useful life of the property in the business, equal the basis of the property determined in accordance with section 204 and articles 1591-1603. Due regard must also be given for current upkeep."
In other words, depreciation should cover upkeep charges and proper allowance for the original purchase price of the equipment over a reasonable life. This seems to be about the general decision of the government. It is well to note, however, that in the retail meat business, depreciation charges do not always run the same. This is because progressive business methods require that certain equipment be constantly kept up to date. It very frequently happens that equipment is not used for as long a time as it was intended.
Depreciation Example of Refrigerator
A well-constructed refrigerator has been known to last for 30 and 40 years and still longer. The progressive market owner, however, who buys a refrigerator today for $800.00 will probably find that in three years' time his business. will have grown to such an extent that he will require double the size of the refrigerator. For that reason he buys a new refrigerator of a larger size and gets an allowance of $400.00 on the .old refrigerator. In other words the actual depreciation charges are about $133.00 per year, and such losses should be recorded as actual expenses. Modern business equipment, such as cash registers, adding machines, computing scales, electric meat cutters and slicing machines are constantly being improved upon. Equipment of this type usually does not serve as long as it is intended, but is traded in for more improved models when they appear on the market. Any allowance submitted for the old equipment should always be considered in estimating the depreciation on equipment.
One of the leading chain store companies carry depreciation charges on equipment on their books so that the total outlay expense is written off in five years. A great many other chain stores and larger markets, when the subject of depreciation was investigated, were found to be charging an average of about 2% per month for depreciation. Others have been found where a charge of 1% monthly was made for depreciation. From a conservative standpoint, the 2% per month depreciation allowance indicates good business practice.
With the figures established and given in the various forms, the retailer will find it comparatively easy to open up his own set of books. The system is so flexible that it can be made up to suit the conditions of each market. It has been the hope of the author to bring out principally such figures as are actually required and which are of the greatest benefit to the retailer.
A simple and correct bookkeeping system is the retailer's guide in conducting his business successfully. It is required also in order to know if one is successful in business or not.