Christmas at the Mall: An Accounting Story
Author’s Note:
Explaining accounting and finance can be pretty dull. That’s a problem, if you need to learn accounting or finance.
On a 2015 plane trip from St. Louis to Seattle, I decided to try and fix the problem. What if I could wrap some accounting concepts inside of a quirky (funny?) short story. My goal here is to present some information, then add another step in the story. So, when you get to the end, you’ve been reminded of an accounting concept- but you’ve received the information in a light-hearted way.
This story explains inventory management.
(By the way, I actually did leave my infant daughter- who is now almost 23- on a bench in a Mall at Christmas).
And now……Christmas at the Mall…..
Christmas season was heating up. The first week of December was always busy for Mary and the staff at Trendy Dresses. Mary had run the dress shop successfully for five years. By this time, she had a good handle on planning for the holiday season.
Today, she needed to figure out how much inventory she needed to meet customer demand- and how her shop would generate the cash to pay for it. Mary had good inventory controls in place, which allowed the store to generate a profit.
A well-dressed woman in her 40s walked up. She was with her daughter who looked to be about 10 years old. “Excuse me, do you have the Arctic Wind scarf in any other colors?”
Mary glanced at the shelves to the right of the cashier. “Right over here- we should have all of these scarf colors available through December.” The woman smiled and stroller over to the scarves with her daughter.
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Mary walked quickly back to her small office and glanced at her PC. Over the last few years, she was able to take earnings out for her income, and retain some earnings in the company for future business needs.
In the spring, Mary always planned purchases for the holiday season. Given her recent success, she decided to invest more retained earnings into inventory. Arctic Wind Scarves were going to be a big hit for the holidays. Mary decided to carry a big inventory in a variety of colors.
She leaned forward to check her current inventory. Fortunately, her point-of-sale (POS) system updated her inventory after each sale at the register:
Cost Per Unit: $50 Number of Units: 120
Total Inventory= $50 * 120 = $6,000
As she scanned the detail, she noted at least 10 scarves in each of the 10 available colors. Satisfied, she headed back to help customers.
The woman and her 10-year old daughter were trying on scarves. The husband approached them. “Yea, honey- the baby spit up some food on her sweater. I don’t see any wipes in the diaper bag. Do you have any?”
“Where’s the baby!?”, the mother quickly responded- startled.
“She’s right outside”, the husband said. “I didn’t want to pick her up- the food might spread over the sweater.”
“GET THE BABY, BOB!” The mother and daughter rushed out of the shop with the now-embarrassed husband tagging along behind.
This scene created quite a stir in the shop. Most of the shoppers were women, and they were all appalled by a husband who would leave a baby unattended. “I’d kill my husband if he ever did that”, muttered one woman as the cashier rang up her purchase.
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Mary found that the big challenge for the shop was maintaining enough inventory during the peak holiday season. Obviously, Mary couldn’t let the inventory get too low. If she ran out of burgundy scarves, for example, she might lose some sales. Her ability to track inventory was a critical business factor.
During December, Mary monitored her inventory one week at a time. She wanted to always have an inventory of a least 3 scarves per color. With 10 colors, that was 30 scarves at $50 each, or a minimum level of inventory of $1,500.
The 120 scarves was the ideal inventory level for the start of the busy December weekend. Restocking the shelves, thought Mary, was the tricky part.
So far this morning, the scarves were a big seller. A woman in her 70s handed three of the scarves to the cashier.
“My grandkids will love these”, she smiled. “Just give me a sec to find that coupon you mailed me.”
And the long, arduous process began.
First out were a pack of gum, a tin of mints and hand sanitizer. Then Kleenex, gloves, an umbrella, and car keys. Finally some vigorous digging before a wallet emerged. The four people behind her in line seemed relieved.
“Now, just let me get the right coupon and we’ll be all set”, said the women. Scraps of paper spilled onto the counter. There was a hint of groaning from the others in line.
“Here, let’s slide over to the right so I can help you”, Mary said. As the other customers checked out, Mary searched through the pile. After five minutes of looking, she simply gave the older woman the price from the missing coupon.
Problem solved, Mary headed back to her office. So, the desired level of inventory was $6,000, and her minimum level- her floor- was about $1,500. She forecasted that she would sell (120 – 30), or 90 scarves each week.
She took a sip of tea. Mary needed to restock 90 scarves a week during December. At $50 a scarf, that’s $4,500 she thought.
Mary glanced out of the office into the shop. A group of teenage girls were all facing each other- all talking at once, and all typing away on their phones. Could anybody hear anybody else? she thought.
She returned to the inventory issue and considered here costs. OK, she thought, say I sell….rounding up…$5,000 in scarves a week for 4 weeks. That’s about $20,000 in scarf sales December. If I carry about $5,000 in inventory on a given day, my inventory turns over 4 times ($20,000 / $5,000).
There was a loud chorus of “OMG” from the teenagers just outside. Someone must have used up too much data- and Mom just found out.
If the shop were going to sell $20,000 in inventory for December- Mary would need cash to buy that inventory- probably each week.
Fortunately, Mary was able to collect cash from sales quickly, 90% of her sales were through credit cards. Her credit card vendors paid her within two days.
As she mulled that over, Mary took another stroll through the shop. She noticed a man weighted down with shopping bags just outside the shop doors. Definitely a pack mule, she thought. Pack mules carried all the mall purchases while the other person shopped. A boring but vital part of the shopping mall experience.
The shop was busy, and customers had a strong interest in looking at scarves. Mary mulled over her ordering process. She had a good vendor for the scarves, and the vendor was able to fill orders with just 3 day’s notice. Once the order was placed, scarves were delivered in 2 days. Start to finish, the ordering process took 5 days.
The Christmas carolers were just outside. This was the best part of the busy season, Mary thought. Most of the shoppers stopped and turned to listen. They sang two carols, then headed down the mall after applause.
Since Saturday was her biggest selling day, Mary planned her purchases to arrive on Fridays. That allowed her staff to restock shelves before the weekend. Orders were placed on Mondays, and the scarves arrived on Fridays.
Mary flipped open the checkbook. She paid for the scarves, each week using a debit card. Since she had good cash flow from the heavy credit card use by customers, cash flow was not an issue.
She logged off of her PC, and started out of the shop to lunch. OK- $5,000 in scarf sales a week (at cost). She walked down the mall and waved at another shop owner. Well, what if sales were $7,000 a week? That would be $28,000 in sales in a 4-week month of December. That would also mean buying $2,000 more inventory each week.
She paused by the food court. Well, if 90% of customers still paid by credit card, she’d have sufficient cash flow for the inventory purchases.
Maybe I’ll get Chinese.
Ken Boyd
Author: Cost Accounting for Dummies, Accounting All-In-One for Dummies, The CPA Exam for Dummies and 1,001 Accounting Questions for Dummies
(email) ken@stltest.net
(you tube channel) kenboydstl
Image: David Porter, Christmas Lights, (CC BY 2.0)