Branching Out — Accounting For Multi-Site Business
Essentially, branch accounting is reporting results per branch — where the business in question has more than one branch. Obviously, this is a sensible thing to do, as results will vary — and, consequently, decisions about what to do at/with the branch will vary.
Branch accounting is most commonly done at Profit and Loss (Income Statement) level. Certainly, this is the case where much of the administration of the branches is centralized. However, where this is not the case, or where there are significant assets held at branch level, Balance Sheet (Position Statement) level reporting is/should be also done.
This does, of course, mean the accounting software in use must enable reporting in this way. Ideally, the software will also enable drilling down to the base level transactions to ascertain the reasons for variance between branches.
For example, a branch in a well-to-do area may sell more of a certain product/range of products/type of products because the local customers can afford those (higher-priced) things. This may also give rise to better margin performance at that branch. That said, the lease/rent costs in that area are likely to also be higher, so more margin is likely to be necessary. Branches in more out-of-the-way areas may face higher costs elsewhere in their results — for example, due to the additional freight to get the inventory items to the store.
As Daniel Keys Moran noted:
In other words, the business needs to measure relevant, useful KPIs. That way if will have comparable, reliable data — which when combined and interpreted appropriately leads to the kind of information necessary for decision-making.
As with all parts of any business, the more data that is captured (in a usable state), the more analysis can be done, and the more understanding can be gained — in order to make informed decisions. Using the well-to-do-area store example, you would — knowing the type of products favored by the store’s clientele — send more of that type of product to that store, for example. You would also record web sales as a different branch — as these would have a different cost-base. This also applies to any sales made from Head Office.
Another advantage of recording by branch is that inventory recording this way enables greater clarity around stock losses. I.e. if there’s a problem with pilferage — be that staff or ‘customer’ — this will be clearer when you can see these by branch. (You could also see it by department, by stock type, by line item, and even by supplier — if that’s how your system is set up.) It is, of course, possible that these ‘losses’ are just a result of staff error, in which case you can then identify where training must be done (by branch).
Speaking of inventory, it is perhaps here where one of the complexities arises — because (usually, at least) the inventory is first booked into the Head Office storage, then transferred to the store(s). Life being what it is, there will also be transfers back to Head Office — whether for damaged stock, or stock recalled for redistribution or some other reason. There will likely also be transfers between stores. All this is to say that the inventory system — recording inventory by location — will need to be mirrored in the branch/Head Office financial statements.
Taking this to an international level, Philip Green is quoted as saying:
In case it’s not obvious from what he said, and what I’ve already noted, systems are crucial in accounting for multi-site businesses. They are, essential in any business, but as the business grows, and particularly opens other sites, fit-for-purpose systems are a must.
I guess it’s obvious, but will mention it anyway — payroll costs would need to be recorded by location. This can get a little tricky where employees work at more than one location. However, modern payroll systems are set up to record this without too much problem.
It is also possible, where recorded suitably, to establish which marketing efforts give the best bang-for-buck by branch. Broadly speaking, you might see a surge in sales in one branch as a result of one type of marketing, but not so much in another store. However, a different type of marketing might have the opposite results. Also, some stores may get better results from local marketing, rather than that done across the business’s trading areas.
Recording sales by branch at till level carries with it the ability to know which branches take more cash, as distinct from credit/debit card or credit. Consequently, different security arrangements may be necessary if a branch has considerable cash takings, versus one which has next to no cash transactions.
Petty cash spends — preferable to simply taking cash from the till — should also be recorded by branch, and this will highlight where some are perhaps a bit more generous with themselves than they should be. It may also make clear if a particular branch is not receiving items from Head Office in a satisfactory condition, and has to keep paying for repairs, for example.
A direct consequence of all of this recording by location is the ability to ascertain the profitability of the business’ branches — both at gross margin and net margin levels. This provides the ability — once line items have been investigated — to know where to focus efforts in order to improve poor-performing branches.
It also highlights those branches that are performing extremely well — giving the opportunity to identify the reasons for that good performance, in order to replicate that, where possible, across other branches. Ultimately, the detailed reporting also provides justification for closing a branch that cannot, despite all (well-informed, due to branch reporting) efforts, be raised to the necessary performance level.
Howard Schultz described the ultimate aim for any (retail) branch:
Making any retail store a ‘wanna be there’ place involves not just computer systems, but also customer management systems. And then there’s the people those customers inter-relate with, and who use those systems to serve them in such a way that they do ‘wanna be there.’
A corollary to segmenting the recording of Balance Sheet (Position Statement) items by branch is that it is possible to establish a return on investment (ROI) for those branches. Some branches will necessarily cost more to establish for a range of reasons. For example, the level of fit-out costs in a mall tends to be prescribed by mall management — as does the frequency with which that fit-out must be updated. A street-side (usually called a strip) store may not cost as much, and fit-out refurbishment frequency may be left to the business. Also in malls, there are a number of additional costs mall management must be paid for.
Also a part of Balance Sheet (Position Statement) recording, as part of the Sales transactions, is Debtor (Accounts Receivable) recording. Having these documented by branch enables a stronger local focus on debt collection and credit management. By this, I mean, that the store staff will/should know the customers who are not good payers, and deal with them according to the business’ policy.
This segmented recording also reveals stores where these policies are not being adhered to as strongly as elsewhere — providing a further opportunity for training. It might also identify where ‘something is going on’ as far as allowing customers to purchase more when the business policy is breached as a consequence of those sales.
Many of my above comments tend to be toward branch accounting in retail/warehouse scenarios. However, most can also apply to a business with multiple manufacturing/service branches. In these instances, it is also helpful to use this recording to analyze the efficiency of these branches — and this is particularly useful where more than one branch is performing the same functions. Once again, this provides the opportunity to spread best practice from one to another. It also identifies where, after due effort has gone into performance improvement, a branch might need to be closed (in part or in full).
In short, branch accounting is a mechanism for a multi-branch business to slice and dice their results into operating segments, in order to manage results in a better-informed way.
As Carly Fiorina said:
I would take this further and say that we also want to turn that insight into decisions. Decisions that are well informed, laser-focused and targeted at the specific, necessary metrics.
This was first posted at www.beanstalkknowhow.com on September 27, 2019.
