Retail Math One
After a £250m accounting scandal, you will think Tesco would have its financial house in order.
You will be wrong for thinking in that manner.
It has not.
On December 3rd 2015, I went to a Tesco petrol station in Mansfield.
When I got to the kiosk to pay, I realised I did not have the right payment method.
There was no option of making a card payment over the phone, so I was served with a seven day notice to pay.
I was on my way to Ashby from Mansfield.
By the time I arrived in Ashby, funds had been transferred to my PayPal account to enable me make the payment with my PayPal card.
I went into Ashby Tesco Extra and made the payment.
A month later, I received a message from a debt collector demanding the payment I made on the same day.
When I made the payment, I insisted the cashier called the station in Mansfield to inform them that I had made the payment, which she did.
What’s the Point of the Story?
The point of this story is not the fact that my payment was not recorded.
What intrigued me was I did not expect something like that to happen in a company that is already in the midst of an accounting scandal.
It simply means Tesco has not changed it financial infrastructure.
Let’s say hypothetically the station in Mansfield reported a loss of sales that day as a result of my non-payment at that station.
The station in Ashby should have reported an over payment that same day.
Let’s cut them slack and say they did not pick the transaction on the day, which is not supposed to happen in Tesco.
But let’s be generous and say it was not picked up on the day, what about the end of the week?
Or the end of the month?
The Mansfield station reported a £37.00 loss for that day, while the Ashby station reported a £37.00 profit on that same day.
The reality, the accounting in the two stations were wrong on that day.
Imagine the amount of times incidents such as that is played in Tesco petrol stations around the country.
Do you understand the reason Tesco was in accounting mess?
Lessons For Other Retailers
This phenomenon of miscalculation of profit and loss is not peculiar to Tesco.
Profit is a taboo word in retail because the majority of retailers do not make profit a priority.
What is considered profit in retail defies every business logic.
If we use Tesco profit calculation that landed the retailer in trouble as a case study again.
Tesco’s so-called profit forecast was based upon payments that were to be collected from supplies based upon projected sales.
Not on actual sales that was already made, but sales projections.
As it turned out, their projections were wrong.
Let me repeat this point in case you missed it.
The profit Tesco announced to The City was based upon projected sales not on actual sales.
Profit in any business is income minus operating expenses.
Many retailers base profit on sales without taking into account operating expenses and shrinkage.
Shrinkage is the biggest killer of retail profit.
And shrinkage takes different forms one of which is employee error.
Cashier error accounts for a large percentage of retail shrinkage.
As we saw in my case, cashier error at the two petrol stations caused an error in the entire accounting system of Tesco.
The Issue With Retail Mathematics
The real issue with retail accounting is, retailers hire auditors with no retail knowledge to audit their accounts.
Its’ great to have the Deloittes and the PwCs auditing a company’s accounts.
The tiny problem with that is, many of their auditors have no retail knowledge.
Numbers on paper are simply numbers.
What makes numbers useful is the story behind them.
When you have auditors who have never stood behind a retail counter for a single day in their lives, how do you expect them to know the story behind the numbers in a retail store?
This is why many retailers fall into the trap of micky mouse accounting.
If the auditors knew the stories behind Tesco numbers, they would have helped Tesco fix its financial infrastructure to prevent repeat of a £250m blunder.
My simple message to all retailers is this: the story behind your numbers is the true measure of how well your store is performing.
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About the author
Romeo Richards is an experienced retail trainer and consultant with knowledge of retail marketing, store performance and retail loss prevention.
He has the ability to choreograph the customer journey, boost store conversion and enhance in-store experience using store design and visual merchandising.
Specialises in increasing retail profit through shrinkage reduction.
He is the author of 23 retail and marketing books including:
• How to Increase Retail Sales
• How to Make Profit In Retail
• Store Design Blueprint
• Visual Merchandising Display
He is the creator of five retail home study courses.
Frequently presents webinars on shoplifting prevention and boosting retail sales.
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