Behind the Gavel: Proper software serves transition to integrated accounting

Work-arounds: We’ve all used them. Sometimes, we use them for so long that they become our normal way of doing business. Eventually, the cost of a workaround — in time, money and aggravation — becomes so high that we consider changing the way we do things.

A few months ago I spoke with a dealer whose business was at just such a point. Her records consisted of spreadsheet lists of inventory and sales, and her business had grown too complicated to continue to use such a cumbersome system. She sold online, executed estate sales, displayed at antique shows and sold on consignment. Details were getting dropped, sales were being lost and she was spending too much time keeping track of sales, merchandise and settlements.

The dealer asked me to suggest a comprehensive software system that would track all of the operational information she needed to access while simultaneously keeping her books. Her objective was to enter information once, and then be able to access that information in real time for various sales venues, inventory acquisition, customer details and settlements. After all, she said, this was the 21st century, and it’s a mobile world. Surely there must be software available that would fit her needs.

At the time, I didn’t know what to suggest. There were software programs available that would track consignment sales, or online auction sales, or retail sales of owned inventory, or do accounting, but none that would track all of these without some sort of workaround (at least that I knew of). I determined at the time that I would find some suitable software options for growing dealers, and in the past few months I have interviewed CPAs, read software reviews and browsed dealer and software user forums. I’m now in a better position to make software suggestions.

There are several software programs available that do a good job of tracking consignments and settlements, but don’t interface with accounting software. There are also good small business accounting packages — QuickBooks is a popular choice — but most don’t do an effective job of tracking consigned inventory.

At the root of my dissatisfaction with most retail software is that the programs can’t differentiate between consigned inventory and store-owned inventory. Inventory that is purchased for resale is an asset, just like cash. Inventory that is taken on consignment is never owned by the store and is therefore not an asset. Adding consigned inventory to your accounting system as an asset is a bad practice. First of all, in most jurisdictions you’ll have to pay personal property tax on it just as if you own it. Also, adding consigned inventory as an asset completely skews the analysis of your financial statements: You don’t get an accurate picture of your return on investment or inventory turns.

A couple of typical accounting software workarounds for consigned inventory include entering inventory as an asset and setting the consignor up as a creditor, or establishing a liability account to offset the consigned inventory “asset.” Accountants find these methods satisfactory because they can keep the books in balance.

When working with consignment shop software, a common workaround for store-owned inventory is to list the store owner as a consignor. From a management standpoint, all of these workarounds are unsatisfactory. Title to consigned inventory remains with the consigner (owner) and passes through the dealer to the purchaser. The dealer never owns it. The commission collected by a dealer for selling an item is a service fee. Consignment-only dealers (like auctioneers and some consignment shops) that never buy and re-sell their own inventory can keep their books on a cash basis. Other cash basis businesses include real estate brokers, attorneys, accountants and other service businesses. But as soon as inventory is purchased for resale, the entire accounting picture changes.

Dealers who buy their own resale inventory invest in — and own — their inventory. Inventory is an asset of the business. Consequently, the IRS requires that such dealers keep their books on an accrual, not cash, basis. Accrual accounting notes economic events whenever they occur, regardless of when the associated cash is spent or collected. Buying inventory is such an event: Buy now, sell later. Or, buy inventory now on credit, and pay later.

When an accounting system is set up, a choice must be made between cash or accrual accounting. These two methods are mutually exclusive; one or the other must be chosen. But accrual accounting programs don’t like consignments, and cash accounting won’t accommodate owning resale inventory. You can see why dealers selling from a mixed owned/consigned inventory would have trouble finding a suitable software solution.

If I was going to open another store, my first choice in operating software would be Liberty4 Consignment with the Recommerce module add-on. The software accommodates both store-owned and consignment inventory and interfaces with QuickBooks. It also has multiple payment and shipping options, and customer relationship management. Inventory is entered into the system once, and then can be uploaded to eBay, Google Commerce, a Liberty4-hosted ecommerce site and executes web marketing tasks as well.

My second choice would be either ConsignPro or Simple Consign. Both interface with QuickBooks and can handle consigned and owned inventory.

Know what you expect new software to accomplish and that it will do what you want it to do before you open your checkbook. Make a spreadsheet list of what you must have, and then add in “nice to have” features. Then research your available options. Note on the spreadsheet which software packages will perform which functions. Don’t forget to consider the cost of new hardware, if any will be needed.

Meet with your accountant to discuss the software you have selected. Don’t, under any circumstances, let your accountant talk you into a workaround using software he’s familiar with. He (she) won’t have to deal with the workarounds every day like you will. An accountant’s job is to balance your books and calculate your profits and taxes. Their job is not to give you advice on how to run your business. You’re the boss. Insist on having what works for you. Better to find a new accountant who has your best interests in mind than to live for years with unsuitable software.

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