Off the Cuff: Issues in Industry Specific Accounting – Part 2 of 2

SHOP MANAGEMENT

Off the Cuff: Issues in Industry Specific Accounting – Part 2 of 2

July 20, 2009
By Mark L. Venit, MBA, Contributing Writer

In Part One, we looked at accounting philosophies and perspectives, different types of accountants, software considerations and general ledger issues. Now, let’s examine industry-specific aspects of constructing general ledger categories (or accounts). Doing so can give you more insight in terms of monitoring costs, performance levels and, of course, understanding how key components determine your bottom line.

For a look-see into industry-specific general ledger accounts, I’ve created a PDF of the general ledger format I routinely recommend to clients. This ledger is not meant to be used in its entirety, nor does it work for all businesses. But reviewing the categories in it gives you a good look in to the diverse issues you and your accountant will have to consider.

Depending upon the size and particulars of your company, any item might need to be expanded or categories might need to be broken down in myriad ways by department and on a consolidated basis. You might have pull-downs for subcategories, and even pull-downs within pull-downs for sub-subcategories.

There are some intentional inconsistencies of entries to show there’s more than one way to handle various aggregated categories, such as advertising, payroll, etc.

Please note that this chart does not reflect the accounting structure used by the largest operations in our business channel. Those operations would be businesses that manufacture (cut and sew) blank garments and/or contract decorators that offer several pre- and post-decoration procedures. These services might include pretreating, specialty dyeing, multiple tagging (licenses, bar-coding, romance tags, security tagging), labeling or re-labeling, folding, bagging (including heat sealing, attaching headers and/or hangers), etc.

In these applications, where apparel decorating is only one phase of the product’s creation, a more specific manufacturing-oriented accounting system is more appropriate.

Operating Ratios
Currently, I know of no free source of definitive operating ratios for apparel graphics companies. In February 2001, Impressions published a detailed empirical study I did for the apparel graphics industry. The lengthy report focused exclusively on custom apparel decoration operations, and had no validity for sales agencies, contract operations or preprinters. It was weighted for mathematical harmonizing of the core data, and is, to the best of my knowledge, the only such study ever published. Click here to download a PDF of that study.

The Specialty Graphics Imaging Association (SGIA) produces an annual “Operating Ratio” report, but it’s based on voluntary responses from SGIA members. That’s not a representative sample of the custom decorating industry, but does offer some comparative benchmark information.

Defining and developing your internal ratios can be challenging at first. However, once you establish benchmark ratios for your company — in all its various endeavors — you will be capable of not only tracking costs, but also identifying trends by comparing data over time.

From there you can establish benchmark standards and goals. Once you’ve accomplished these tasks, you can begin to assess performance through your accounting system. This can break down ratios in hundreds of different ways — in production or sales — by cost per impression, per thousand stitches, per decorated location, per hour, per machine, per operator, or by selling margins of profitability. This will give a reasonably good handle on what’s working well and what isn’t.

Understanding how the various components of production operations impact profitability (i.e., pre-production, contract work, team wear, custom work, preprints, etc.) gives you the means to evaluate progress. This is particularly helpful in analyzing labor costs, the largest single component of your Profit & Loss Statement after garment purchases.

With data in hand, your employees will be able to work toward meeting and exceeding empirical standards. Employee performance is now quantifiable, and measured performance now becomes a factor in salary and bonuses.

Other Issues
How you distribute your company’s overhead costs into your departments and other expense accounts and segregate sales categories are issues where your accountant — hopefully a Type Two — will really earn his or her fees. (For information on Type Two accountants, click back to Part One of this series). By offering insight into controlling costs, modifying prices and finally getting performance-based information from your own numbers, you and your accountant can frame the right questions in appropriate context. Providing him or her with the chart of accounts as shown on the PDF will undoubtedly strengthen his/her ability to understand your business.

Given the variables I’ve cited above and in Part One — accounting perspectives, accounting software choices, general ledger considerations, benchmarking operating ratios, and some of the more esoteric details in the art and science of accounting — a decision to fine tune and upgrade your accounting system will pay dividends on the dividends you’re in business to earn.

Think of the exercise as a pathway to building both your own Early Warning System and a Report Card. You’ll also have a big incentive to pay closer attention than ever to bottom-line results.

Mark L. Venit, MBA, president of Apparel Graphics Institute, Ltd., provides management and marketing consulting and proprietary research to apparel graphics companies throughout the Americas and Europe. Author of several books and nearly 400 articles on management and marketing, he also serves as chairman of the board of ShopWorks Software.

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