Case Taking Account: The Little Guys Accounting is a vital part of every business, large and…

Case

Taking Account: The Little Guys

Accounting is a vital part of every business, large and small. The Little Guys—an independent retailer based in the Chicago suburbs that specializes in selling and installing home theater equipment—is no exception. How does The Little Guys stay ahead of big guys such as Best Buy and Wal-Mart? By focusing carefully on what its customers want and purchasing and stocking merchandise wisely. The firm has made a name for itself through customer service, including hiring a friendly, knowledgeable staff that is eager to educate customers on the latest high-tech equipment. And it has adapted to changes in the market. “The biggest change in the industry is that five years ago brands drove people to our store,” observes co-founder David Wexler. “Today, the manufacturers’ brands are everywhere, so the brand is now us. It’s ‘The Little Guys’ name that’s most important.” In fact, industry surveys confirm that consumers now care more about customer service and financial incentives than they do about big brand names in consumer electronics.
Making decisions about such issues as merchandise and staff payroll is all part of accounting—both short term and long term. Co-founder Evie Wexler handles most of the day-to-day accounting for The Little Guys with the help of the software program QuickBooks. Many small-business owners use such commercially available programs to help run their firms. Wexler reports that QuickBooks simplifies many accounting tasks, automatically placing data in the correct category. “[QuickBooks] writes all the checks, so that when you balance the check book, it’s all there,” she says. “When we started, we were small enough that someone could have kept the books by hand. What we’ve grown into—the amount of things we receive each day, the amount that goes out, the number of employees we have—it’s too complex. The program gives us a better picture of what goes on in the business every day.”
For more complex accounting issues, the Wexlers turn to an outside accountant, whom they view as a business consultant—not just someone who fills out forms and reports. They have relied on their accountant’s expertise from the beginning. “When we first opened the store, we worked with the accountant as a consultant,” recalls David. “He helped us understand some of the technicalities of opening a business. We wrote out a business plan.” The business plan specified how much they would spend on advertising, rent, utilities, payroll, and other expenses.
Operating expenses such as payroll and overhead must be tracked carefully. Payroll in particular is a complicated accounting task for The Little Guys. The sales staff is paid based on a percentage of sales, providing an incentive for each salesperson to perform. “Because we pay on a percentage, payroll is difficult,” explains Evie Wexler. “There are percentages and base pay. There are lots of idiosyncracies—401k, federal tax, [state] tax, Social Security, and Medicare. You have to track all of this.” Overhead expenses such as warehousing and truck maintenance are another part of the accounting puzzle. And the retail store also needs to be insured. “When you look at your profit/loss statement, you can see how much it costs you to do business every day,” says Evie.
The Wexlers and their business partner meet to review financial statements for each quarter. They evaluate each expense category to determine whether they are spending too much or not enough to get the results they want. David focuses on the sales figures for each month and compares them with the same month of the previous year. He notes that when they started their business, he tried to look at the sales figures for every day. But he learned that “you can’t do that—you’ll drive yourself crazy. Now I’ll look every week or ten days. You need a bigger slice of time.” He points out that variables such as snowstorms, five Saturdays in a month, or a major sale can all skew the numbers. But he explains that they examine overall trends to make decisions. Perhaps surprisingly, Evie says, “We don’t set financial goals. We look at how we did for the year. Then we’ll decide how much better we’re doing this year.”
The Little Guys prides itself on offering customers the latest, highest-quality home theater products. With those high-end products come high prices. But the firm’s customers don’t pay the ticket price. Instead, they negotiate a deal for a full home theater system, including installation. This customization affects the firm’s cash flow. “Sometimes we find ourselves in hot water, and then we react,” says Evie. During one season, customers were placing special orders for items that The Little Guys had to pay the manufacturers for up-front. Meanwhile, in-stock items were sitting on the shelves. So the Wexlers instructed the sales staff to concentrate on selling those in-stock items in order to improve the store’s cash flow.
Because The Little Guys is—yes—little, it can be more flexible in the way it handles buying decisions than larger firms can. “Most businesses are more structured,” says Evie. “Because we own the business, we don’t buy new things without talking to each other. We have to be a little bit risky in order to be flexible and offer our customers the best products.” As a result, the business doesn’t have a rigid budget for the products it purchases. But the Wexlers wouldn’t operate any other way. Evie admits that worrying about bills sometimes keeps her up at night. But years of experience have taught these business owners that they can compete successfully against the big guys.

1. What role does an outside accountant play for a small firm like The Little Guys?

2. How might accounting help The Little Guys grow as a business?

3. For The Little Guys, create a table with three columns and list the major classifications of data in the accounting equation— assets, liabilities, and owners’ equity—that could be used later in the firm’s balance sheet.

4. Evie Wexler says that her firm does not have a rigid budget for purchasing items to sell in the store. But what role does a budget play in planning and providing standards by which The Little Guys can measure its performance?