Streamlining Financial Reporting for Shoe Retailers
Alan’s Expense Classification System
By Alan Miklofsky, Professional Shoe Dog
September 28, 2024
Running a shoe store involves managing a wide array of expenses that can vary greatly across different categories. Many retailers find themselves overwhelmed with a multitude of accounts that make it difficult to see the big picture, especially when trying to assess profitability and make long-term financial decisions. To address this, a new system was developed over 30 years ago by Alan Miklofsky, in conjunction with his partner and business controller, Ron Hyman. Together, they managed and perfected this system over many years, and Alan has since taught it to other shoe retailers who have found it extremely useful.
This accounting framework consolidates numerous financial accounts into five major expense classes:
Administration, E-Commerce, Marketing, Occupancy, and Personnel
This approach simplifies financial reporting, enhances the strategic understanding of past business performance and makes it easier to make forward looking projections.
The New Expense Classification System
Administration: This category includes general overhead expenses such as office supplies, professional fees, administrative salaries, auto expenses, banking charges (including charge card processing fees), and travel expenses. By grouping these costs, it becomes easier to monitor operational efficiency and identify opportunities to reduce unnecessary spending.
E-Commerce: This class captures all online-related expenses, including website maintenance, online transaction fees, and digital advertising. In today’s retail environment, e-commerce plays a critical role, and having a clear view of these costs helps retailers strategize better and optimize their online presence. If you account for your E-Commerce sales as a separate “class”, you can more easily define your brick-and-mortar results from your e-commerce results.
Marketing: Expenses related to promotional activities, customer loyalty programs, and brand positioning are categorized here. Consolidating marketing expenses allows shoe stores to measure the effectiveness of campaigns and allocate resources more effectively.
Occupancy: This class focuses on costs related to maintaining physical locations, such as rent, utilities, common area maintenance (CAM) charges, maintenance, repairs, and property services. Given the high cost of real estate in prime shopping areas, understanding occupancy expenses in relation to total costs is crucial for profitability.
Personnel: This category includes all employee-related costs, including wages, benefits, and payroll taxes. It provides a clearer view of labor’s impact on profitability, especially in an industry where customer service is a key differentiator.
Benefits of Consolidation
Clarity and Simplification: By condensing numerous smaller accounts into five primary categories, store owners can quickly grasp where the major expenses lie. This system reduces the complexity of financial reporting, making it easier to identify trends and potential problem areas.
Improved Expense Ratio Analysis: Consolidating expenses allows for the calculation of expense ratios (expense as a percentage of total revenue) over a long-term period. This backward-looking view provides valuable insights into historical performance, showing how costs have fluctuated in relation to sales.
Enhanced Profitability Projections: With a long-range view of historical expense ratios, projecting profitability becomes much more straightforward. By understanding how expenses typically behave over time, store owners can make more informed decisions about future investments, hiring, and marketing strategies.
Strategic Decision-Making: The ability to see which areas are consuming the most resources makes it easier to reallocate funds or cut costs as needed. For example, if e-commerce expenses are rising faster than revenue, the business can explore ways to streamline logistics or optimize digital marketing spend.
Better Communication with Stakeholders: Whether discussing financial health with partners, presenting to potential investors, or simply communicating with team members, having a streamlined system makes it easier to tell the company’s financial story. The major expense classes serve as a clear framework for illustrating how the business is performing.
Implementing the System: A Practical Approach
To implement this system, a detailed review of the existing chart of accounts is necessary. Each expense should be categorized under one of the five major classes. Software tools and accounting systems can be customized to reflect these changes, ensuring that every transaction is recorded under the appropriate heading.
Once the system is in place, reports can be generated monthly, quarterly, or annually, allowing for a consistent review of financial performance. This regular evaluation helps in recognizing patterns early and enables prompt action when needed.
Important Aspect
The system described above focuses on categorizing Operating Expenses to provide a clear picture of the core business performance. When Gross Profit is reduced by Operating Expenses, the result is Ordinary Net Income, which is comparable to EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). This metric offers valuable insight into the company’s profitability from regular operations. Beneath this line, non-operational items are classified separately as Other Income and Other Expenses. This distinction ensures that gains or losses from non-core activities, such as investments or one-time events, do not distort the assessment of day-to-day business performance. For example, Extraordinary Income—which is covered in more detail in a separate article on this website—is also categorized under Other Expenses. By isolating these items, retailers can gain a clearer understanding of how the business is truly performing, allowing for better strategic decision-making and a more accurate portrayal of financial health.
Conclusion
The new expense classification system offers shoe retailers a practical solution for managing their finances. By consolidating expenses into Administration, E-Commerce, Marketing, Occupancy, and Personnel, store owners can gain a clearer understanding of their cost structure. This clarity not only simplifies day-to-day management but also lays the foundation for more accurate profitability projections and strategic planning. Implementing this system can be the key to driving both operational efficiency and long-term financial success in the competitive shoe retail market.
This system and its approach were created over 30 years ago during my long-term partnership with Ron Hyman, to help manage and grow our own business. We refined it through years of experience, and I have since shared its benefits with other shoe retailers, helping them achieve improved financial performance and profitability.
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Alan Miklofsky is a semi-retired Professional Shoe Dog with a distinguished career in the footwear industry. Over the decades, he successfully ran an award-winning shoe business while dedicating 29 years to the National Shoe Retailers Association (NSRA) Board of Directors, including serving as Chairperson from 2009 to 2011. Today, Alan channels his expertise into creating content on issues vital to independent shoe retailers and offering consulting services with a focus on financial oversight. Learn more about Alan Miklofsky online at:
https://sites.google.com/view/alanmiklofskypersonalwebsite/alan-miklofsky
https://www.linkedin.com/in/alanmiklofsky/