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FinancialManagement An Introductionfor Community ShopsTraining Manual



For further community shop support please

telephone 01993 814388, or email [email protected]

For information about Making Local Food Work visit www.makinglocalfoodwork.co.uk

Financial Management An Introduction for Community Shops – Training Manual

ContentsPage

1. Introduction 2

2. Why good financial management is necessary 3

3. Meeting the business needs 44. How to organise 14

5. Specific topics for community shops 15

6. Useful contacts and publications 22

Annex:

Glossary of finance terms 23

The content in this document is for guidance only. Whilst every care has been taken to ensure that the facts contained in this manual are correct at thetime of printing, they should not be relied upon in the event of a technical or legal dispute. They are

not a full statement of the financial and legal obligations under legislation. If in doubt, seekprofessional advice.

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November 2009







1. Introduction

Good financial management is necessary in any business and this applies equally to community enterprises as much as to commercial ones. Evenif the objectives of the business are not primarily financial, producing a surplus to re-invest in the

shop or another community project is important.

Financial management is not rocketscience! Do it well and the shopmanagement will have the time to focus

on developing and growing the businessfurther. Do it badly and it can derail thebusiness, create unnecessary tensionbetween people and damage theenthusiasm and commitment ofcustomers, stakeholders, suppliers,employees, voluntary workers and the wider community that are essential tofuture success.

The objective of this financial management

manual is twofold. Firstly, to demystify theprinciples and jargon used in finance andsecondly, to provide practical advice and tips tohelp with the day-to-day reporting and otherbusiness needs of the shop. It is an introductionto the topic and further information is availablefrom the organisations listed in Section 6 or fromyour accountant. By the end of the manual, the reader should be

familiar with:

Procedures for the smooth and controlled flowof cash in and out of the business.

The purpose and nature of the key financialstatements and management accounts.

Preparation of a budget.

Measurement of financial performance andthe use of key performance indicators tomonitor the retail operation.

The content is structured to reflect the key needsof the business and there is a Glossary of financeterms in the Annex .

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Businesses that are profitable can fail because thereis insufficient cash available to pay bills. Businessesthat are cash-rich can fail because the underlyingactivity is not profitable and they soon run out ofmoney. Having spare cash in the business is not thesame as profit. Profit is less visible and of course,

may or may not exist.

Nothing in business is risk-free but anunderstanding of the financial circumstances isessential if a business is to be managed effectively

and successfully.

Financial transactions are fundamental to any business and a community shop is no exception. Ina retail context the challenges are particularly great:for example, a shop with a turnover of £150,000 islikely to process over 40,000 transactions using arange of payment methods including cash, cheque,credit card and coupons. Addressing this and othersources of complexity requires financial processes,systems and reporting structures that are effectiveand efficient for the management and governanceneeds of the business.

The five main business needs relating tofinancial management are as follows:

1. To manage the flow of money in and outof the business effectively and efficiently.

2. To manage the business and monitorperformance.

3. To provide information for the control

and governance of the organisation.4. To meet the obligations as an employer.

5. To meet the other legal, tax andreporting obligations.

Proven techniques and tools that are used widely elsewhere in the business world are available tohelp with financial management in community shops. We will now explore these in Section 3.

2. Why good financial management is necessary

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The five business needs on page 3 areinterdependent and in this Section we look at how

a shop may address each of the needs in detail.

Financial managers use a series of standardfinancial statements and tools which may befamiliar to members of the community group to agreater or lesser degree. Examples are the Budget,Balance sheet, Profit & loss account and Cash flowstatement. During the course of the manual we willoutline the purpose of each and highlight ways of

preparing and using them in a community shopcontext. But first, we will consider the managementof money flows in and out of the business.

3.1 To manage the flow of money inand out of the business effectively and efficiently.

In this Section we will cover two activities that areimportant in the running of a shop: book-keepingand banking. One point to highlight at this stageis that in business terminology the term ‘Cash’ isused to include cheques and card payments as wellas currency.

In a community shop money flows in twodirections:

Money in: from customer sales, grants,loans and capital from stakeholders inthe business.

The objective is to get the money intothe bank account in a timely manner without losing any of it on the way.

Money out: as the business pays bills

for supplies, utilities, rent, rates andother overheads, as well as to meetcommitments such as loan repaymentsand tax payments to Government forNational Insurance, VAT andCorporation tax.

Here the objective is to ensure that theright amount is paid at the right time tothe right people.

Book-keepingBook-keeping is the administrative function ofrecording financial transactions. It is the foundationon which all financial reporting and managementactivity is based. At a basic level there are four setsof records that help with the running of a business:cash flows in and out of the business, sales,purchases and wages. The four tools used tomanage these are the Cash book, Sales ledger,Purchase ledger and Wages book.

Anyone with suitable experience can act asa book-keeper for a community shopthough it is best practice that it is someoneother than the shop manager.

In the past, financial accounts were kept onpaper and in some smaller businesses thispractice continues. Simple spreadsheets may be developed for the purpose or a well-knownpackage, such as Sage Instant Accounts orQuickbooks, could be used.

3. Meeting the business needs

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Using a package helps reduce the risk of

information loss: a spreadsheet could be wiped in error! Whichever system is used,there should be a regular back-up of theinformation in case of a problem.

Typically, the book-keeping duties at a community shop will take 5-8 hours per month. Goodorganisation of the paperwork and timely action iskey to making the process efficient (and hopefully as painless as possible!).

Whenever a financial transaction takes place, two

things happen: something is gained and somethingis lost and the value is equal and opposite. Thisimportant principle underpins book-keeping andaccounting practice. In accounting speak, for every debit (money coming in), there is a credit (money going out). For example, when a shop buys productfrom a supplier it gains an asset as stock increasesbut losses another asset as cash decreases.

End of day reconciliation. Every effort should bemade to manage the flow of money in and out in asmooth and controlled manner. The amount of

cash, cheques and credit card receipts should becollated at the end of every day and the total cross-checked with the sales recorded for the day. Thissimple process is called Reconciliation butsometimes ceases to be simple when discrepanciesoccur.

Remember that discrepancies may occur for anumber of reasons, for example a keying error in atill entry or a mistake with customer change. It isbest practice to have a policy on the level ofover-counting and under-counting that isacceptable. Monitor the occurrence ofdiscrepancies and investigate any patterns thatbecome evident. This is a good way of identifyingproblems with volunteers who are not followingprocedures or theft.

Some tips on book-keeping:

Use simple systems, ideally in electronicformat, which can be easily picked up by others covering the job.

Update the books regularly, ideally on a weekly basis. Monthly may be morepractical but remember that problemsolving is easier if things are recent andfresh in the mind. This will also reducethe need for a large time requirement ata later date.

Record every transaction, even smallexpenses, especially when the cash istaken from the till. This will make iteasier to reconcile any discrepancies andin the case of expenses, reduce theliability to tax at the end of the year.

Where possible, make payments tosuppliers by direct debit, cheque or BACSrather than with cash payments from thetill. This will ensure that there is an audittrail. Whatever system you use, it is vital

that all volunteers understand andadhere to it.

Check the business bank account on aregular basis. This task is made easier with an internet banking service: don’t wait for the statement at the end of themonth when you can reconciletransactions on a weekly basis using aninternet access facility.

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Banking

The high street banks offer business bankingservices but unlike personal bank accounts, mostbanks make a charge for transfers in and out of abusiness account. It may be possible to get a freebanking service and it is worth shopping around.

When choosing a bank, consider the ease oftravelling to deposit cash, often out of normalbank opening hours.

Internet banking has greatly improved theinformation available to businesses both onbalances and the status of receipts and payments.

Where a shop has a Post Office and yourbank permits the use of it for deposits, itusually makes sense to do so. Check with your bank to find out if they offer thisservice.

The number of cheques and cash to be depositedmay be reduced if a shop accepts payment cardsand offers cash back. There is more informationon these topics later in the manual.

Making deposits. There should be a clearprocedure on bank deposits that includes whodoes it, when, where and how. Best practice isthat deposits are made by the shop manager orwhen they are unavailable, by another nominatedemployee or Management committee member.

Typically, in a busy shop, there is a daily depositof cash and cheques. Alternatively, if the shophas a secure safe, deposits could be made every few days.

Where a safe is used, it is good practice toestablish a threshold level above which adeposit is made. A record should be madeof all amounts placed in and removedfrom the shop safe and premises. Makesure that the shop’s insurance policy includes insurance cover for cash in transit.

3.2 To manage the business and

monitor performance.In this section we will cover budgeting, cash flowforecasting, management accounts and how tomonitor performance.

Budgeting

Setting a budget is one of the most importantactivities in any business. It is a step in the planningprocess and as such should reflect the objectives ofthe business.

A budget will help you to control and manage

finances. You can check that the money needed tofund the business will be available and makeinformed decisions based on the information itprovides. In addition, a regular review ofperformance against the budget will help the shopmanagement focus on progress against thebusiness plan.

A budget is different to a forecast. It is aplanned outcome that the Managementcommittee wishes to achieve. Unlike a

forecast, it is not a prediction.

Usually a budget will be for a trading year with abreakdown by month. It is recommended that thebudget preparation process is completed inadvance, ideally 3 months, before the trading yearbegins. However, in practice most businessescomplete the budget closer to the start of the year.

When starting up, a business can chose the enddate for its financial year. This does not have to

follow the April to March tax year and somebusinesses schedule the year end outside the mainholiday periods and when business is quieter, forexample in January.

Think about who is involved in preparationof the budget. The engagement of people with practical experience of the shop willkeep it real and help with getting theirbuy-in later on.

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Usually, the budget preparation process will start

with sales revenue and consider the cost ofpurchasing stock, staff costs and other overheads.Historic and current knowledge is a good startingpoint for the calculations, however, dueconsideration should be given to potentialchanges in the future, with inflation of particularsignificance. Consideration should also be givento any investment required and sources of fundingto pay for it.

Whilst community shops have a socialpurpose and a strong desire to support the

local community it is recommended thatthe shop is run on a business basis with atransparent surplus or profit target in thebudget.

A target will give everyone the focus necessary forsuccess and when achieved, the surplus fundsmay be distributed in line with the wishes of theManagement committee provided this iscompliant with the regulations that apply to theshop. For example, the Management committeemay decide to use part or the entire surplus to

invest in new equipment, add to the shop’sfinancial reserves or donate to a worthy causelocally.

Reserves. The Management committee shouldhave a policy on financial reserves held by thebusiness.

Reserves are useful: they may be essentialfor a rainy day, perhaps to coveroverheads during a poor trading period,or to build a fund for future investment or

expansion of the shop.

There is no magic formula for the right level ofreserves. The Management committee coulddecide to use a percentage of turnover or a fixedamount as a target level. The important thing itthat there is a policy agreed by all on thecommittee. This will make decisions on how to usesurplus funds more straightforward.

It is worth highlighting two related areas that acommunity shop should consider carefully. Firstly,

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as there is an understandable desire to repay

loans quickly, for example from the localcommunity, the committee may not leave the shopwith sufficient reserves to cope with unexpectedexpenditure.

Secondly, the committee may assume that any grantfunding that helped to establish the business will bethere for subsequent developments. This may notbe the case and the Management committee may not give enough focus to the accumulation of acapital fund to improve the shop or sustain it in thelong term.

Cash flow management

Generally in the retail trade, there is a regularsource of money from sales to customers and this isusually a strength of the business.

There are two reports commonly used in businessrelating to cash flow: a forecast and a statement. A Cash Flow Statement is a historical summary of themovement of money in and out of the business overa trading period (more on this later).

A Cash flow forecast is a different tool. Thisis an analysis of the money that will flow inand out, where it will come from and go toand when it will happen. The business shouldprepare a Cash flow forecast as part of the budgetpreparation process for each month in the tradingperiod. As the year progresses, a rolling monthly forecast is a useful tool to help monitoring of thebusiness. Some retail businesses produce a daily forecast for a two week period as a routine.







From a Cash flow forecast, we want to know the

amount of money that is available over the periodto check, for example, that there will be sufficientmoney to pay a large bill due on a specific date inthe future. If the forecast identifies a shortfall, thenthe advance warning gives the business anopportunity to find a solution, for example, by rescheduling payments, bringing in capital orapproaching the bank for an overdraft facility.

Forewarned is forearmed and a potential lender islikely to view the advance planning favourably. In ahappier situation, a business may find that it has

cash that could be deposited in an interest-bearingdeposit account. Where a business is planninginvestment, for example in new equipment, theforecast may be helpful in planning when the itemis purchased.

The calculations must include all income into thebusiness, including any planned loans, grants andcapital invested by stakeholders. Equally, it shouldinclude all payments including to suppliers, foroverheads and Government commitments such asNI, PAYE tax, VAT and Corporation tax. Critically,

the amounts should be placed in the period that theflow will actually occur and not when the invoice isreceived, in the case of a supplier.

Remember that whilst the shop is collecting VAT every day, payments are made on aquarterly basis. This is not your money! Youare collecting it on behalf of HMRC andthere are penalties for late payment of it.

The shop should also consider the set asideof funds to pay any Corporation tax liability that is expected. The shop’s accountant canhelp with this.

Management accounts

Management accounts are a set of financialstatements that are considered sufficiently accurateto help the shop manager and Managingcommittee to understand the trading position of thebusiness.

There are no rules on what format is used. Theimportant thing is that they provide sufficient insightfor business decision making.

Typically, Management accounts are preparedperiodically, for example monthly or quarterly, and

include a comparison of performance against theoriginal budget. Spreadsheets are ideal for thepresentation of this information: use a structure thathighlights the differences between actualperformance and that planned both in terms ofvalue and as a percentage of the expected figure.For a retail business, the following areas are ofinterest on a monthly basis: sales turnover, grossprofit, wages, cash flow and the bank balance.

A book-keeper should be able to provideManagement accounts information to the

specification required and this is relatively easy if anelectronic accounting package is used.

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Monitoring performance

The Cash flow forecast and Management accountswill provide good information about the tradingposition of the business and its viability. However, itis good practice to monitor key numbers morefrequently, often on a weekly basis, to see how thebusiness is developing. Simple easy-to-calculateperformance measures can show how the businessis changing over time.

In addition, we all like to know how well we aredoing in relation to other people and this is where itcan get more complicated. Community shops come

in all shapes and sizes, making it very difficult tomake direct comparisons. A bright modern shop ina large village is clearly likely to perform betterfinancially than an old Portacabin in a tiny settlement – although they can be equally importantto the communities they serve.

In the next section we will consider three areasfor comparison that the shop management may find useful:

Comparing actual sales figures against

budget. Actual sales achieved should be setagainst the budget – the difference between the twois known as the Variance. Sales will inevitably fluctuate week-by-week, as influences such as theweather hold sway. However, if a clear patternemerges over time, particularly if you get a numberof weeks below budget, then you should investigatethe reasons for it.

Comparing actual sales figures againstlast year. This comparison is useful and can bequite motivational for staff. The display of weekly sales figures for this year and last year as twoseparate lines on a graph is a powerful tool to letstaff know how well they are doing. Do be awarethat movement of events such as Easter and bankholidays can mean peaks and troughs do notalways coincide exactly, and that price inflationwill usually mean that this year’s figures lookbetter than last year, even if you are actually selling the same amount of goods. Many community shops have this graph on their staffnotice board for all to see.

Comparing one shop with another. The retailindustry (and remember that even if yourobjectives are not commercial you are still part ofthe industry) uses a number of measures of howwell a shop is doing.

Sales per square foot per week. This is thetotal sales turnover divided by the availablesales space. This measure can be helpful whensales space has been changed, for exampleafter an extension, or when changes are beingconsidered. It can also be used to compare therelative success of different community shops,although of course the figures can vary widely depending on local circumstances. As abenchmark, at the time of writing fewcommercial village shops are viable with a sales

figure of less than about £8 per square foot.

Sales per hour. This is the total sales turnoverachieved per hour. This is very helpful whenreviewing the shop’s opening hours or whenscheduling volunteers. For example, you may want more staff or more experienced people attimes when sales are at their highest. Youshould try to schedule activities such as stockcounting or replenishing shelves when sales areat their lowest and this measure is helpful forthis purpose.

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As another example, if you find that you achieve

very few sales between 5pm and 6pm, then it isat least worthwhile considering whether to closethe shop an hour earlier. Conversely, if salesduring the period are high, then it suggests thatextending opening hours to 7pm would meet acommunity need and increase sales.

Sales per staff hour. This is the total salesturnover divided by the sum of the staff hoursfor the same period. Again, this may be usefulwhen planning staff cover generally or oncertain days of the week. If you have an EPoS

system and can easily monitor sales for eachhour of the day, then it can be quitemotivational for volunteers to know how muchthey have sold during their stint – provided itdoes not get too competitive!

Number of weeks’ stock. This is the value ofstock held at a point in time divided by theaverage weekly sales. This will vary dependingon the nature of the shop and the productranges sold, for example, selling newspaperswill reduce this figure markedly as they are sold

on the same day as they arrive. This is a very important figure to monitor.

A typical figure would be about three weeks’stock. Figures far removed from this sort ofvalue could suggest over-stocking, tying up ofunnecessary capital and risking stock remainingunsold before its sell-by date. Conversely, itcould also suggest under-stocking leading toout-of-stocks, lost sales and disgruntledcustomers.

Community shops have objectives other thanfinancial and there are three indicators that may help you decide whether you are meeting yoursocial objectives.

Market share. Every year a Government

agency, the Office for National Statistics (ONS),publishes the results of a large survey of howhouseholds spend their money. You can look uphow much the average household is spendingon the specific ranges you stock and thenmultiply by the total number of households inyour community. This will give you anapproximate guide on how much potentialcustomers are spending on the ranges youstock.

Divide the shop takings by this figure to give you

an estimate of your market share. A typicalfigure would be about 20% but figures can vary considerably between shops. A low figure wouldsuggest that the shop is not meeting the needsof most residents and could prompt questionson how to improve the business.

The spending information and details of thepopulation of your parish at the time of thelast census are available from ONS at www.statistics.gov.uk

Proportion of the community using theshop. This is perhaps the most important figureof the lot but the hardest to actually calculate.Typically, in the case of shops, about a third ofthe community population are loyal customers,a third are occasional customers whilst theremaining third do not use the shop. If you thinkyour shop is not reaching this level ofcustomers, then you really need to find out whatyou are doing wrong and what you need to doto appeal to the community you serve.

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Proportion of total sales made to

volunteers. Many community shops find that asignificant proportion of their total sales aremade to people who are volunteers. There isnothing wrong with this but the shop is likely toneed a wider customer base if it is to besustainable. It is worth investigating the relianceof the shop on the custom of the volunteercommunity and possible opportunities to extendbusiness to others in the community.

Taken together, these measures should help youmonitor how well you are doing and alert you to

any developing problems. Don’t be afraid toexplore other measures that may be relevant toyour particular circumstances. Providing that theinformation makes sense, there are no rules onwhat management information is used for internalpurposes.

The monitoring of performance can contribute tothe marketing of the shop to the local community,volunteer and staff management, as well as forgovernance purposes in the Managementcommittee.

A key task for all community shop managers is tomotivate and retain volunteers. Everybody likesfeedback on their performance and to feel that they are part of a successful team. Letting them havesimple feedback is likely to help achieve this. Asalready suggested, a simple graph pinned to thebackshop notice board showing the weekly saleslast year and this year can be a real motivator.

3.3 To provide information for the

control and governance of theorganisation.

In this section we move on to the key documentsused by a business to report on the performanceduring the trading period that has ended: theBalance sheet, Profit and loss account and Cashflow statement.

Balance sheet

The purpose of the balance sheet is to setout the financial position of the business ata particular point in time. Note that it:

Is a snapshot of the business’ overall worth.

Shows how the business is funded andhow the funds are being used.

Shows the assets and the claimsagainst the business.

The Balance sheet must always reflect the actual

circumstances on a specific date, normally the lastday of the trading year. In accounting practice, theclaims on the business, the liabilities, are deductedfrom the total assets to give “Net assets”. This isbalanced (hence the name) with the Capitalinvested in the business, for example from profitsgenerated in the trading year.

The balance sheet can provide useful insights intothe financial position of a business, for example itsLiquidity. This is the ability of the business to meet itsshort-term obligations from its liquid (cash or nearcash) assets. Low liquidity may present a problemand should be reviewed by the Managementcommittee.

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Profit & loss account

The Profit & loss account, sometimesknown as the income statement, shows thetotal revenue generated less the totalexpenses incurred in generating thatrevenue.

It must always reflect the actualcircumstances within the business for thetrading period.

There are two distinct calculations of profit:

Gross profit: the total amount of profiton all sales (and other) income afterdeduction of the direct costs of buyingor making the stock that was sold.

Net profit: the net figure after the othercosts (the Overheads) have beendeducted from the Gross profit. Thisfigure is before the deduction of any Corporation tax and is commonly known as the ‘Bottom line’.

The Balance sheet and Profit & loss account are nota substitute for each other: they perform differentfunctions. However they are closely linked through,for example debtors, creditors and stocks.

Cash Flow statement

The Cash Flow statement is a summary ofthe cash receipts and payments over thetrading period. As such it is an historicanalysis of cash movements in the business.

Your accountant will prepare this cash flowstatement as part of the annual accounts.

3.4 To meet the obligations as an

employer. As an employer the business has a commitment topay staff in a timely and accurate manner.Someone, for example the book-keeper, will needto calculate wages each week (or month) andprovide payment and a payslip to the individualmembers of staff.

Under the PAYE system, the business actslike an agent of HMRC, calculating andcollecting National insurance (NI) andincome tax for each employee. Therefore, the

wages calculations will need to take account ofemployee National Insurance contribution andincome tax requirements.

The business is required to pass the NI and taxretained to HMRC on a regular basis, usually quarterly. Remember that there may be anemployers NI contribution in addition tothat retained from the employee.

Don’t forget to budget for any trainingrequired, for example for a food safety certificate for shop workers.

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3.5 To meet the other legal, tax and

reporting obligations.Typically, a community shop is incorporated as anIndustrial and Provident Society (IPS). Every IPShas to submit a Mutual Societies Annual Return(AR30) to provide financial data and otherinformation such as details of the members of theManagement committee. This submission is aresponsibility of the society’s secretary and it isgenerally not an onerous requirement (though itmay be a little scary!).

There is usually no requirement for submission of

audited accounts. However, it is goodpractice to have them audited on a voluntary basis as part of the governancemeasures put in place by the Managementcommittee.

Reporting requirements are different for shopswith other legal forms: Community interestcompanies, Partnerships, Limited companies andUnincorporated associations all have rules andthey differ.

The basic legal requirements for financialmanagement of a business are to:

Provide timely and accurate annualaccounts

Pay VAT and corporation tax asrequired

Keep PAYE records and make paymentsfor all paid employees

Retain financial records (for six years)

You will need to know the precise shop turnover.For instance, if the turnover is more than a certainamount (currently £68,000) in any twelve-monthperiod, you are obliged by law to register for VATpurposes within 30 days of crossing thisthreshold. Failure to comply can result in heavy penalties. There is more information on VATregistration later in the manual.

Record-keeping. You are required by law tokeep all the documents which form the basis ofinformation on the tax return for six years. Thisincludes bank counterfoils, goods in and outrecords, bank statements, sales invoices,purchase orders, cash books, PAYE calculationsand VAT.

Think about how and where documentsare stored and how to make them easy tofind if required in later years. It is bestpractice to label documents clearly and

store them away from the shop in a safeplace.

Also consider the format in which records arestored. If important information is stored in anelectronic format only, think about whether youwill be able to access it if it is required in a fewyears time. The technology used may becomeobsolete or unusable when new IT is introduced. Ifthis is a risk, keep a paper copy.

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Experience has shown that community shopsoperate most successfully when there are clearly defined responsibilities and reporting lines onfinancial matters.

In general, the organisation approach tofinancial management works well:

The shop manager is responsible forthe financial performance of the store.

The shop manager reports to a financesub-committee or nominatedindividual, for example a Treasurer, onfinancial matters.

The work of the finance sub-committeeor nominated individual is regularly reviewed by the full Managementcommittee.

There are established and clear writtenpolicies and procedures that areunderstood by anyone involved in shop

finance.

Policies and procedures. Policies andprocedures should be thoroughly understood by and easily transferable between people involved inthe business. This is particularly important wherevolunteers may work irregular hours or on a part-time basis. They need to know how to undertakeroutine tasks, for example, end of day reconciliation.

Shops may find the following two practicaltips helpful:

Embed activities into a regular routinefor the shop. Activities such as a tillreconciliation at the end of day andbanking become easier when built intothe routine.

4. How to organise

Give individuals ‘ownership’ of specificactivities. This can apply to a range ofjobs, for example the entry of new deliveries onto the financial system,payment of bills and book-keeping,irrespective of whether this isundertaken by a volunteer orprofessional.

There are a raft of policies and legal proceduresthat shops need to be aware of, have in place and

follow. They should be explained to new volunteersand it is recommended that they sign a documentto confirm that this has happened. Two areasrelating to finance are:

Employment. Staff employed in the shop arecovered by employment legislation and musthave a contract of employment. They must bepaid at least the National Minimum Wage andmust get appropriate holiday entitlement.

Volunteer staff will cease being classified

as volunteers if the authorities considerthat they are receiving a payment of any sort. Even a staff discount could beconstrued as a benefit and mean they have to be paid the National Minimum Wage and comply with PAYE andNational insurance legislation.

Insurance. Where necessary there should beprocedures in place to ensure that staff andvolunteers comply with insurance requirements.Community shops are generally familiar with

the different types of insurance that arenecessary for the business.

One exception is car insurance: shopsshould consider the insurancerequirements where volunteers areusing private vehicles. Usually, thecarrying of goods is explicitly excludedfrom standard policies.

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There are a number of financial managementtopics relating to profitability, cost control andsmooth operation that present specific challenges

for community shops, namely:

Value Added Tax (VAT)

Corporation tax

Staff scheduling and opening hours

Managing volunteer workers

EPoS

Stock control Card payment and cash back

Managing the risk of theft

Pricing

Cost control

We will consider each in turn in this Section of themanual.

Value Added Tax

There are currently three rates of VAT on goods

normally sold in retail shops:

Standard rate (currently 15%)

Lower rate (currently 5%)

Zero rate

A lot of food categories are zero rated however,some products are subject to the standard rate ifjudged to be luxury items. Hence, for example,biscuits are zero rated whilst cakes attract VAT –you may remember a legal case over recent yearsago to determine whether a Jaffa Cake is a cakeor a biscuit, with many million pounds of taxrevenue riding on the outcome. Shops often sellitems that are exempt from VAT, for examplepostage stamps. If you are in doubt about whichcategory a line falls into, look at the invoice whichaccompanied the product when it was bought tosee what rate applied.

5. Specific topics for community shops

VAT is a complex topic and we will consider threeareas in more detail:

VAT registration. All businesses with a turnoverabove £68,000 per year (at time of writing) haveto register for VAT and this applies to the majority of community shops. Shops below the turnoverthreshold can register voluntarily. To register for

VAT you will need to fill in one or more forms andsubmit them to HM Revenue & Customs (HMRC)for approval. You will then receive a VAT-

registration number and certificate.Calculating the amount due. HMRC has threestandard VAT schemes for retailers. They can beused for retail sales only, though an occasionalcash trade sale (to another business) is oftenpermissible. The three schemes are the Point ofSale Scheme, Apportionment Scheme and theDirect Calculation Scheme.

A community shop must agree with HMRC whichscheme it uses and there are specific rules that

apply to each. Point of Sale Scheme. Under this scheme

the shop calculates the tax due on sales by identifying the correct VAT proportion when asale is made. This is relatively easy to do andadminister with an EPoS system or if there aredifferent departmental buttons on a till, so thateach item sold is recorded as VAT or non-VATliable. The use of different coloured pricetickets would enable volunteer staff todistinguish goods at different VAT rates.

Once your system has produced the totalvalue of sales of goods at each VAT rate forthe period, then you can easily calculate the

VAT you owe.

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Apportionment scheme. The shop uses the

invoices from suppliers to calculate the overallproportion of the goods bought in that attractsthe different VAT rates. This proportion is thenapplied to sales: for example, if 25% of stockbought has 15% VAT, then you assume that25% of sales are made at 15% VAT.

Whilst this has the advantage of being simpleto operate, if there is a higher profit marginon zero-VAT products than on standard rate,then the shop will end up paying more VATthan is necessary.

Direct Calculation Scheme. Under thisscheme, the shop calculates the expectedselling prices of goods at one or more VATrates and this is then used to calculate anoverall “average” percentage of VAT to apply to the total turnover. For example, if 75% ofthe goods sold are zero rated and 25% attract15%, then the overall percentage is 3.75%.This can be applied to the total sales figures toobtain an estimated liability.

Paying VAT. There are three payment schemesand each has advantages and disadvantages: the

Annual accounting scheme, Cash accountingscheme and Flat rate scheme.

Annual accounting scheme. You pay VATon account throughout the year in ninemonthly or three quarterly instalments, whichare based on the amount of VAT you paid lastyear or, if you have been trading for less thana year, an estimate of your VAT liability. Youcomplete one VAT return at the end of the

year and either make a final balancingpayment or, if you have overpaid, receive arefund.

This system can reduce administration andmake it easier to manage your cashflow.However, you still have to keep all required

VAT records and accounts. Annual Accountingis not suitable for businesses that regularly reclaim VAT as you would only get onerepayment at the end of the year.

Another disadvantage of Annual Accounting is

that if your turnover decreases, then you willoverpay through the year before you get yourrefund at the end of it.

Cash accounting scheme. Usually VAT ispayable when an invoice is issued. However,under this scheme, you do not pay the VATuntil your customer has paid you and youreclaim VAT on your purchases when youhave paid for them.

Cash accounting can help your cashflow ifyour customers are slow to pay and is goodfor businesses with bad debts. Under thisScheme, you do not pay the VAT if yourcustomer does not pays you. The Cash

Accounting Scheme may not be for you if youregularly reclaim more VAT than you pay, or ifyou buy a lot of goods and services on credit.

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Flat rate scheme (FRS). This is designed to

help small businesses reduce the amount oftime they spend accounting for VAT. Using theFRS you do not have to calculate the VAT oneach and every transaction. Instead, yousimply pay a flat rate percentage of yourturnover as VAT. This makes for easier recordkeeping and gives a clear idea how much VATis owed.

HMRC has standard percentages it applies todifferent industry sectors. This percentage isless than the standard VAT rate because it

takes into account the fact that you are notreclaiming VAT on your purchases. At time ofwriting, the flat rate for businesses categorisedas “retail food, confectionery, tobacco andnewspapers” is 2% of turnover.

Although the FRS can reduce your paperwork,one downside is that you cannot reclaim VATon your purchases. If you buy a lot of goodsand services from VAT-registered business, youcould end up paying more VAT. Also, if youmake a lot of zero-rated or exempt sales, you

could end up paying more VAT because youwill still pay the flat rate percentage on yourturnover for those sales, even though you arenot charging VAT on those sales.

Every shop is different and it is best to getadvice from an accountant on the mostconvenient and appropriate VAT schemeto use when you are setting up. You canchange systems later on if necessary.

Corporation tax

All community shops are liable to pay Corporation Tax on their profits. There is arequirement to register with HMRC and completean annual tax return each year. The forms areusually completed by your accountant (paid orvolunteer). The tax liability stems from the figuresin the annual accounts, whether they are auditedor not.

Staff scheduling and opening hours

One advantage of using EPoS is that the systemcan provide information on sales registered in thetill over the day. There may be a local, community or other reason why it is necessary for the shop tobe open for business at times when trade is quiet.

An analysis of the sales figures, either from anEPoS system or till receipts, will help the managerdecide on the number of people required on duty.

Managing volunteer workers

Volunteer workers play an important role in therunning of community shops and a typical shop

may have 50 or more people on a volunteer list.The nature of their availability, usually part time,and diverse retail experience makes it importantthat consideration is given to the ease by whichprocedures and policies are understood andtransferred to volunteers.

New volunteers should receive a formal inductioncovering the basic finance and other proceduresin the shop. Working alongside another volunteermay be the most effective way of achieving theawareness and understanding of the procedures

that is necessary.

Use documents such as laminatedinstruction sheets, policy books, daily checklists, daybooks and notes on the tillto make sure volunteers are aware of andunderstand their responsibilities and theprocedures. If necessary, remind them.

Some shop managers choose to allocate specificroutine jobs to volunteer workers, for examplebooking in deliveries or stock counting. This

routine is likely to reduce the training requiredand may make it easier to get the best from thevolunteers.

The business should have a policy on a minimumnumber of people on duty at any time. Someorganisations require a minimum of two peopleon duty for health and safety and security reasons.

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Use of EPoS

The term EPoS (Electronic Point of Sale) is ageneric term used to describe electronic systemsused at a till in a shop or where a transactionoccurs in a different type of business. There is avariety of system types and a number of suppliersselling products in the market. It is fair to say thatopinions about the use of an EPoS system aremixed. There are some community shops thatwould advise that it is avoided completely whilstothers that feel they could not run the businesswithout it.

In practice there is a wide range of till and EPoSsystems used in shops and these may be broadly classified, in order of increasing sophistication, asfollows:

Till: no breakdown of detail (dissections)

Till: VAT and non-VAT dissections

Till: VAT and departmental dissections

Till: records sales by short item code

EPoS: records line-by-line sales, sends data toseparate spreadsheet for analysis

EPoS: full sales analysis within the package

EPoS: sales analysis and stock control

EPoS: sales analysis, stock control andordering stock electronically

Newspaper accounts can be added where this isappropriate.

It is possible to run an efficient operation at very different levels of technical sophistication. A key element is the relationship with the volunteers asoperating the till can be a headache for somevolunteer staff. There is a significant purchase costfor EPoS equipment, although systems have gotcheaper over the years. In addition, staff time isrequired to keep the system updated. For thesereasons, EPoS is usually only justified in a shopwith turnover above, say £2500 per week,although there are community shops operating atbelow this level successfully.

The main benefits of using EPoS are:

It will reduce the time required for bookkeeping and therefore the cost.

VAT returns are easier to complete. You haveaccurate line-by-line sales data and thismakes the production of a quarterly VATstatement straightforward and will help ensurethat you pay only the VAT due.

It eliminates the need for individual pricing ofitems, a potential saving of volunteer time.

Price changes can be implemented quickly when a new cost price comes through toprotect gross margin.

There is less room for error in the price ofproducts sold.

You are able to have a read out of sales soyou can monitor any stock losses more closely.

It can provide information to informmanagement decisions, for example on theproduct ranges to expand or contract, theeffects of promotions and changes in layout.

You can accurately monitor sales by time of

day and use the information to help plan staffrotas and even shop opening hours.

It makes day-to-day re-ordering easier. Youhave clear information on what is selling andwhen it needs to be re-ordered.

The process of scanning provides a moreprofessional transaction at the till and willoffer customers an itemised receipt.

The use of EPoS divides opinion – some shops seeit as indispensable, others think that the setup

costs are not worthwhile. Quite often shopsbuying EPoS end up with a system that is toocomplicated for their needs – for example, using itfor stock ordering involves a lot of work to ensurethat stock numbers in the system are accurate andis probably not worthwhile doing for mostcommunity shops.

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For shops with very low levels of turnover it is

quite likely that the cost and effort is notworthwhile. It is also true that one of the key benefits for commercial shops – the time savednot having to price stock individually – is less ofan issue for community shops, where this is anactivity that volunteers are often happy carryingout.

Elderly volunteers are sometimes very wary ofusing an EPoS system, although often this alsoapplies to the use of ordinary cash registers aswell. A lot depends on the quality of the training

and support given to volunteers.

Experience leads us to recommend thatcommunity shops look at the options provided by EPoS and then decide whether it is right for them.

Stock control

Stock control is key to running a successful shop.Efficient control will ensure that you have the rightamount of stock in the right place at the righttime. It will also help ensure that capital is not tiedup unnecessarily.

Community shops are sometimes risk-adverse:they are too slow to discontinue old lines andintroduce new ones. Successful rangemanagement involves taking risks and sometimesfailure!

There is a balance between holding too muchstock and the risk of selling out. The decisionwhen, or even if, to re-order is a function of thecase size where relevant, expected level of salesand the importance of the line. If you stock a

good substitute line then selling out is less critical.The amount of stock held should also reflect theshelf life of the product and the response timefrom a supplier if an additional top-up delivery isrequired.

Counting stock can be combined as a job withchecking sell-by dates. A full stock-take is a majoroperation and is usually undertaken infrequently,often at the end of the financial year. If a printoutfrom an EPoS system is used, be aware thatproduct may be sold between the report being

printed and the count taking place. If the shop isopen for business, ask the till person to record

sales manually for the product category that isbeing counted.

Goods received from a wholesaler or suppliershould be checked against the order and delivery note as a matter of course. Mistakes happen andan early alert to the supplier may help resolve aproblem quickly.

Stock rotation is important to ensure that productis sold in the order of the date code. The simplestapproach to stock management is known as FIFO

(first in, first out). However this assumes that thesupplier consistently provides newer stock onevery delivery.

Check date codes when loading shelvesand make sure that staff always put new stock behind older product so that theearliest sell-by/use-by date is at the frontin the display.

Product dates need constant monitoring and awastage book should be kept to record productthrown away or sold off at a discount.

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important role in reducing the risk of stock losses

and it is best practice to have a minimum of twostaff on duty at any time.

Theft of cash from the till is an extremely seriousand inevitably an emotionally charged matter.Even the suspicion of theft could place personalrelationships with people involved in the shop atrisk.

For this reason it is highly recommendedthat there is video surveillance of the till atall times and that the recording is held forsufficient time until a till balancereconciliation is undertaken.

This is helpful for staff and volunteer workers as itremoves the question of doubt should a mistakeor theft occur.

Do not have more money in the till at any one time than is necessary and transfersurplus money at regular intervals to thesafe. Under no circumstances leave morethan token amounts of money in the tillovernight: leave it empty and, if it can be

seen through windows, have the draweropen.

Pricing

Pricing is arguably the single most importantdecision that influences the profitability of abusiness and sometimes it receives insufficientfocus. Generally, retail shops determine productprices in a number of ways:

Prices are predefined on price-markedproduct packs supplied by the wholesaler.

The wholesaler or supplier recommends aselling price.

The shop manager adds a standard grossmargin percentage that reflects the profittargets of the business, for example 25%, tothe cost price of products.

The shop manager considers the competitionand sensitivity of prices in the local marketand sets the price accordingly. This couldinclude the use of loss-leader approach onkey lines to attract more customers.

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Card payment and cashback

Nowadays many customers expect to have theoption to pay with a credit or debit card. Thenecessary card processing equipment is availableon a range of contractual options with the cost tothe shop normally based on some combination ofa fixed fee per transaction, a percentage of thevalue of the transaction and a regular rentalcharge for the terminal.

Do not be afraid to negotiate the percentage fee.Sometimes the suppliers are willing to be flexible.Suppliers may offer members of a trade

association, for example the National Federationof Retail Newsagents (NFRN), a discount on thecontract price arrangements. The Federation ofSmall Businesses (FSB) offer a card paymentservice to their members and this may be ofinterest to community shops.

Often shops have a minimum customertransaction value of say £10 or £15 fortransactions involving card payments because ofthe processing cost to the business. An alternative

approach is to charge a separate fee, 50p or £1,on small transactions to cover the processingcosts. These terms of business should bedisplayed clearly in the shop to ensure customersare aware of them.

A cash back facility is likely to add to the range ofservices offered to customers, particularly in arural area where a bank branch is some distanceaway. The service will require planning to ensurethat there is sufficient cash available in the till.Regular deposits of notes will reduce the ability to

provide cashback. Due to the risk of fraud, many shops only provide this facility for knowncustomers. Reducing the amount of cash paid intothe bank may reduce bank charges.

Managing the risk of theftRetail shops are vulnerable to theft of stock andcash from the till. Look for any patterns over time:this may flag up a concern that can beinvestigated further.

The vigilance of the staff on duty plays an







All these approaches may be appropriate in

particular circumstances and most retail shopsuse a combination.

It is recommended that the shopmanagement and Management committeebody establish a pricing strategy to guidethe day-to-day pricing decisions in thestore.

This will ensure that pricing receives the focus itwarrants and that decisions are transparent.

The use of a standard margin mark-up that is

inflexible may mean that the shop is missing aprofit opportunity that a flexible margin policy may provide, for example where a product wouldsell more at a lower price or just the samequantity at a higher price. It can also make ashop seem very uncompetitive; supermarkets takefar less margin on Known Value items (KVIs) thanother lines. This is because shoppers are oftenvery clued up about the going rate for someproducts, for example, milk or bread. However,on other products the difference between 47p

and 49p may be immaterial to the customer butcould make a big difference to profits over a year.

Cost controlControlling costs is in many ways as important asdeveloping sales. Some costs can be reduced oreliminated for community shops, for example afriendly accountant may carry out the audit free ofcharge. However, some costs are unavoidableand it is important that management ensures thatthey are minimised.

Cost of goods. Although you can save some

money by shopping around and usingdifferent suppliers, often the savings arenegated by the cost of doing so. Nevertheless,it is good practice to review supply arrangements from time to time.

Staff. For many community shops, the largestoverhead cost will be the paid manager andany other staff. Retail is traditionally a low-paying industry but many committees rightly recognise the importance of the manager tothe success of the venture and wish to pay a

good rate for the job. Remember that as anemployer, you are liable for additional costsabove the basic wage and items such asNational Insurance, holiday pay and sicknesspay can really add to basic costs.

Electricity. Modern shops have a voraciousappetite for power, with freezers, chillers andperhaps air conditioning all demandingelectricity. Make sure that somebody isfamiliar with the tariff you are being chargedand that any supply requirements when a

contract comes to an end are met as failure todo so can be very costly.

Review prices from different suppliers regularly and switch if necessary. Make sure thatelectrical items run as efficiently as possible forexample, keep grills unblocked. Olderrefrigeration can use a lot more electricity thanmodern models and it may be worthscrapping rather than repairing old modelsfor this reason.

Insurance and banking. As with electricity,keep arrangements under review and changeprovider if there are better deals availableelsewhere.

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There are a number of organisations that may beable to advise or help with more information orspecific queries and some of these are listed below.Business Link, the Government’s business helpservice, is a good source of general advice onsetting up and running a business.

Plunkett Foundation– rural community shops:www.plunkett.co.uk/whatwedo/rcs/ruralcommunity shops.cfm

Making Local Food Work – community shops and local food:www.makinglocalfoodwork.co.uk/about/cslf/index.cfm

Store is the Core:www.storeisthecore.org.uk

Business Link:www.businesslink.gov.uk

HMRC VAT Helpline:0845 010 9000

Association of Convenience Stores:www.acs.org.uk

Rural Shops Alliance:www.rural-shops-alliance.co.uk

Federation of Small Businesses:www.fsb.org.uk

National Federation of Retail

Newsagents (NFRN):www.nfrnonline.com

Office of National Statistics (ONS):www.statistics.gov.uk

6. Useful contacts and publications

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http://www.plunkett.co.uk/whatwedo/rcs/ruralcommunityshops.cfm


http://www.makinglocalfoodwork.co.uk/about/cslf/index.cfm










Accounts payableMoney owed by a company or individual for thegoods or services they have received.

Accounts receivableMoney owed to a company or individual for thegoods or services they have provided.

AmortisationThe writing off of the cost of goodwill or otherintangible assets over a period of time.

Annual percentage rate (APR)The APR gives a more accurate idea of how muchyou are being charged when you borrow money. Itallows you to compare the total cost of borrowingmoney for different types of loan, and lengths oftime.

AssetsThe things that you own, such as buildings andmoney in the bank. The opposite of your assets areyour liabilities.

BalanceThe amount available in your account afterpayment of service charges not includingwithdrawals or debits, or deposits not credited.

Balance sheet A financial statement at a given point in time. Itprovides a snapshot summary of what a businessowns or is owed (assets) and what it owes(liabilities).

Bank giro credit

This is the most common form of paying money into a bank account or making a transfer from oneaccount to another.

Bankers automated clearing system (BACS)This is the system for sending money electronically between banks. BACS payments happen whenmoney is sent from one bank account to anotherelectronically.

Base rateThe interest rate set by the Bank of England which isused as the basis for the rates banks offer andcharge customers.

BudgetThe planned financial outcome that theManagement committee wishes to achieve over aperiod, usually a year.

Capital

The funds in a business contributed by its owners orstakeholders.

Cashflow The money coming into your business and themoney going out.

Creditor An individual or company who is owed money.

Debtor An individual or company that owes money.

Depreciation A cost calculation that allows fixed assets andcapital equipment such as computer equipment, tobe written off over several years. A piece ofequipment bought for £3,000 in 2004 anddepreciated, or written off, over three years has novalue in the accounts after 2007, but has appearedas a £1,000 cost in each of the years in between.This does not reflect the actual value of the assets.

Electronic Point of Sale (EPoS)Electronic Point of Sale equipment such aselectronic tills and terminals.

Financial Services Authority (FSA)Independent body that regulates the financialservices sector in the UK.

GearingThe gearing of a business refers to the percentageof money borrowed from the bank compared tomoney provided by the owners, stakeholders andother investors.

Glossary of finance terms Annex

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Gross A general term indicating that the value is beforededuction of tax or discount. Net is after tax ordiscount.

Gross profitThe value of invoiced sales - whether or not themoney has been received - minus the direct costs ofproduction. The costs are what you have used, notwhat you have bought. Gross profit is sometimesexpressed as per cent on sales.

Income and expenditure statement A schedule of all income received and paymentsmade during a past or forecasted period.

Insolvency When a business cannot pay its outstanding debts,or when the value of its assets is less than the valueof its debts. Insolvency can lead to the bankruptcy of individuals such as sole traders, or the windingup of a business if it is not addressed.

Joint and several liability Where parties act together in a contract as partnersthey have joint liability, which means they are eachresponsible for their share of any debt or loss. A creditor must sue all of the parties together to getthe full amount owed back. If they have joint andseveral liability they are each liable for the entirecontract and the creditor can recover the wholedebt from any one of them and leave that person torecover the shares of the rest from the otherpartners.

Liquid assetsThese are assets such as shares in a company orunit trust, which can be sold quickly to give a cashamount.

Net profitThe gross profit figure minus overheads includingdepreciation. This may be expressed as apercentage of sales. Net profit does not includeinterest charges, dividends or tax.

OverheadsThe costs of running a business (e.g. staff costs,rent, rates, lighting and heating) as distinct from thecost of purchasing or making your own goods.

Profit and loss account A statement of income received during a givenperiod and the costs incurred to generate thatincome. It includes sales, costs and overheads.

Rateable value

Annual theoretical rental value assessed oncommercial properties for the purposes ofcalculating business rates.

Return on investment (ROI)Simple accountancy valuation method that uses thedivision of the gain of an investment by its cost toprovide a percentage figure indicating how well itmight perform. The higher the percentage figure,the greater the perceived return.

Secured loan

A loan in which a borrower pledges an asset suchas a home or car that may be sold if they areunable to repay the loan. Secured lending is viewedas less risky than unsecured lending and interestrates are generally lower to reflect this.

Working capitalThe amount of capital or current assets availablefor use in operating the business. Commonly calculated as the amount by which current assetsexceed current liabilities.

Glossary of finance terms Annex

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The Plunkett Foundation

The Quadrangle

Banbury Road

Woodstock

Oxfordshire

OX20 1LH

T 01993 810 730

F 01993 810 849

E [email protected]

W www.makinglocalfoodwork.co.uk

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