Comparing apples to apples: alternative accounting calendar lets retailers track sales better

Hardware Retailing, Jan, 2007 by Heather Kauffman-Peters

The Julian calendar is commonplace in modern society. It has united the world under one accepted measurement of time. But with its uneven monthly divisions, is it the most efficient accounting calendar for retailers who need to compare peak sales month to month and year to year?

IN SEARCH OF A SOLUTION, retailers in other industries have turned to a more business-friendly calendar incorporating the 4-5-4 accounting method, which uses accounting months that stay the same from year to year.

"I think it is beneficial to any retail industry especially when planning sales, because you are comparing apples to apples, not apples to oranges," says Linda Carter, president of the Retail Management Advisors, an Allen, Texas-based retail-consulting firm for independent retailers.

Many of Carter's clients are in the apparel industry, and Saturday is their biggest sales day. With the 4-5-4 system, every month is exactly the same as the previous year and has the same number of Saturdays. "It facilitates the planning process," Carter says.

The 4-5-4 accounting calendar, which was developed in the early 20th century and is recognized by the Internal Revenue Service as the 52-52-week year, is comprised of 13-week quarters each containing four-week month, five-week month and four-week month progressions. Each month has the same number of selling days as it did the previous year.

"For holidays that are a set day of the week, such as Thanksgiving, there will always be the identical selling days before and after the holiday, year after year," points out Carter. "This makes it much easier for the retailer to compare this year's sales to last year's sales."

According to Carter, the 4-5-4 calendar also makes payroll easier, because the week always ends on a Saturday and Saturday is always at the end of the month. And since each month ends on a Saturday, physical inventory counts are taken at the end of the week. This means retailers don't have to subtract or add sales that preceded or followed the count, making inventory counts more accurate.

"It is really the most beneficial when it comes to sales planning, because you don't have to make adjustments," says Carter. "A retailer may not remember that last year March had more Saturdays than it does this year and will be scratching his head when his numbers are down."

Taking a Different Look

The biggest drawback to using the calendar is switching mindset. Retailers are more familiar and comfortable with the Julian calendar. For example, under the 4-5-4 calendar, November 2006 ended on Saturday the 25th and the remaining days fell into December.

"Some retailers find it hard to make that adjustment," says Carter. "One nice thing about the system is that you can switch without getting IRS approval. So if you try it and don't like it you can switch back. As long as you switch back within the same tax year, it won't matter to the IRS."

Accounting software is another consideration. Some older software packages will not accept the 4-5-4 calendar although most current packages will accept it, especially the real-time database accounting packages that allow business managers to enter any timeline they prefer.

Few hardware retailers are currently using the 4-5-4 system. Scott Plummet of Plummer's Hardware Do it Express in Farmington, Mo., is considering switching to the method. He was introduced to the calendar by the manager of a large department store chain, who said it is very helpful when comparing busy days such as Saturdays.

"It sounds very interesting," Plummer says. "I would like to see a forum about it in the industry."

But whether the 4-5-4 calendar or the Julian calendar is being used, CPA Mark Undis, with United Hardware Distributing Co. in Minneapolis, says the most important action retailers can take to ensure their success is to set goals, monitor them and know where they are against some benchmark on a continuous basis.

What You Need To Know About Tax Changes

Updates for the 2006 Tax Year

Mark Undis, a CPA with United Hardware Distributing Co., recently attended the Minnesota State Society of Certified Public Accountants' Annual Tax Conference. He provided the following list of tax highlights that may benefit or affect hardware retailers for the 2006 tax season.

IRS Tightens the Reins

Congress is very concerned about the Tax Gap--the difference between the amount of money the government would collect if everyone followed all the tax rules versus the amount they actually collect. Two areas that can affect small businesses are Social Security taxes and charitable contributions.

Often small businesses are structured as Sub Chapter S corporations for tax and non-tax reasons. For tax purposes, business owners can avoid double taxation of earnings by structuring as a Sub Chapter S corp. They can also avoid the cumulative 15.3 percent Social Security taxes on wages. Often, store owners take a minimal wage and large dividend distributions. The IRS can attack this structure under the theory of reasonable compensation. The IRS is taking a more aggressive stance in this area and is investing heavily in programs to help identify abuses. Reasonable compensation is based on the services performed by an owner and the fair market value of those services.