Retail Financial Statements Explained

Imagine that a retailer has just closed its books for a quarter. Did it have a profitable three months? What were its total assets and liabilities? What was its net change in cash? The answers to these questions (and plenty more) can be found within the retailer’s three core financial statements: the income statement, the balance sheet and the cash flow statement. These documents summarize key accounting data to paint a picture of the business’s financial activities and position at that point in time and relative to previous periods. With retail sales at an all-time high this year, according to the U.S. Census, it’s more important than ever for retail business owners and finance leaders to diligently track their financials — for competitive purposes, to identify areas where they can tighten their belts and to inform the decisions that lead to long-term success.

What Are Retail Financial Statements?

Retail financial statements are documents that summarize a retail business’s financial activities and results for a particular period of time, such as a month, quarter or year. Internal and external parties, such as accountants and lenders, use them to assess a retailer’s financial health. When compared with output from previous financial periods, financial statements can help retailers uncover trends to optimize or problems to address before they get out of hand. For example, several quarters of increasing shipping costs may signal the need to find a new logistics provider. Financial statements also help retailers generate more accurate sales forecasts, create realistic budgets and allocate their resources to achieve the utmost efficiency.

Key Takeaways

• Retail financial statements summarize a retailer’s financial performance and are used for strategic decision-making.
• As for all other industries, the three primary retail financial statements are the income statement, the balance sheet and the cash flow statement.
• Retailers face unique challenges when interpreting their financial statements, among them fluctuations due to inventory valuation methods and seasonality.

Retail Financial Statements Explained

Retailers typically use the same core financial statements, and follow the same guidelines and formatting, as companies in other industries. The three primary financial statements are the income statement, the balance sheet and the cash flow statement. These three statements work together to reveal various aspects of a company’s finances and to inform future plans. They are often most helpful when juxtaposed against previous periods of similar data.

In the past, many retailers had to pause operations — and, in doing so, any revenue they would have generated — to collect the data needed for their financial statements. For example, inventory counting and valuation couldn’t be done accurately while orders were still moving in and out of the business. Nowadays, modern financial management software (often part of an enterprise resource planning (ERP) system that integrates key data from other segments of the business in a centralized database) can quickly generate financial statements containing up-to-date financial, operational and transactional data, giving business leaders the transparency they need to run their companies.

Here’s a look at the purpose of each of the principal financial statements, along with descriptions of their finer points.

Income Statement, or P&L

An income statement, also called a profit and loss (P&L) statement, sheds light on a retailer’s operational efficiency. It includes the company’s revenue, expenses and profit or loss during a financial period, culminating in its overall net income or loss (“the bottom line”), which indicates profitability. The income statement provides a direct comparison of revenue and profit with expenses, separated by the direct and indirect costs associated with selling goods. The following components are part of an income statement.

• Revenue

  Revenue is the starting point for most financial analysis and profitability calculations. It typically appears on the first line of the income statement, reflecting the net sales of goods and services for the financial period. Net sales account for returns, discounts and any other values that decrease gross sales revenue. These adjustments can be critical for retailers’ understanding of how sales periods and new product lines affect revenue and to inform future marketing and product strategies. Rather than presenting just a single, top-line figure, revenue can also be divided into subcategories, such as by product or store, for more nuanced insights into what is and isn’t working from a profit standpoint.

• Cost of Goods Sold (COGS)

  COGS are all of the direct costs involved in sourcing or producing the goods or services sold during a financial period. They include the acquisition of materials, freight-in and storage costs, labor and depreciation of equipment. This value can help retailers understand their profit margins, consider changes in pricing and merchandising, and show whether the business is successfully achieving its primary goal: selling products to customers.

• Gross Profit

  Gross profit, or gross income, is the dollar amount that remains after subtracting COGS from net sales. More than just showing that goods/services are generating revenue, gross profit must be high enough to cover operating expenses, debt payments, taxes and other obligations. Retailers can raise their gross profits by reducing COGS, raising prices, or negotiating better terms with suppliers, to name a few tactics. This is especially important for retailers that sell goods with thin profit margins, such as groceries and basic garments.

• Operating Expenses

  Operating expenses (OpEx) include the day-to-day indirect costs a retailer tallies during normal operations, such as COGS, rent and utilities, and other expenses stemming from the company’s core activities. They also cover selling costs, such as marketing and commissions, and general and administrative expenses, including office supplies, rent and administrative salaries (collectively known as SG&A). On the income statement, these costs may be itemized or combined into one SG&A line. OpEx and SG&A are subtracted from gross profit to determine operating income, also called earnings before interest and taxes (EBIT), which represents the profit derived from a retailer’s core operations. By tracking operating expenses and operating income, retailers can identify places to cut costs or streamline operations for greater efficiencies.

• Net Income

  The last line of the income statement is net income, which shows how profitable the retailer is after it accounts for all other gains and losses not directly connected with the retailer’s core operations. Those gains and losses might be associated with interest charges, lawsuits or investments. Also referred to as net profit or net earnings, net income is the fundamental indicator of the retailer’s financial success and health. Any improvements or inefficiencies in the business’s finances will likely influence this bottom line, which is the bellwether for how much the retailer can invest in growing the business or the amount to be distributed to shareholders (including business owners).

  Here is an example of an income statement for Retold Tales, a hypothetical bookseller.

  Retold Tales Inc.
  Income Statement
  For the Year Ended December 31, 2022

  	2021	2022
  Net Sales	$2,320,000	$2,570,000
  COGS	$850,000	$900,000
  Gross Profit	$1,470,000	$1,670,000
  Operating Expenses
  Selling Expenses	$370,000	$450,000
  General & Administrative Expenses	$210,000	$270,000
  Operating Income	$890,000	$950,000
  Other gains/losses	$29,000	$35,000
  Earnings before taxes	$861,000	$915,000
  Taxes	$225,000	$250,000
  Net Income	$636,000	$665,000

Balance Sheet

Unlike the other primary financial statements, the balance sheet shows a retailer’s financial position at a specific point in time, as reflected in its assets, liabilities and equity. The balance sheet should always “balance” by following this formula:

Assets = Liabilities + Equity

Assets are things of value owned by the retailer, liabilities are bills and obligations the company must pay, and equity is the overall worth of the company. Because the balance sheet does not focus on revenue or cash flow, it is often used alongside the other two statements discussed in this article to paint a more detailed picture of a business’s long-term financial position. A healthy company will usually have higher assets than liabilities — otherwise, the company owes more than it owns, which means it has negative equity and could eventually become insolvent, due to its inability to meet obligations. For retailers, especially those that take on debt to pay bills, tracking the balance sheet over time can flag potential pitfalls before it is too late to make necessary changes to improve their financial situation.

• Examples of Assets

  Assets are separated into two categories, based on how quickly they can be converted to cash.

  • Current assets can be converted to cash within a year and include cash and cash equivalents, inventory, accounts receivable, prepaid expenses and other short-term investments. Retail organizations will likely have substantial amounts of inventory among their current assets; sales of that inventory, combined with other current assets, fund their day-to-day operations.
  • Noncurrent assets are long-term investments, such as storefronts, warehouses and equipment (commonly referred to as property, plant and equipment, or PP&E). They also include intangible assets, such as trademarks and goodwill, which contribute toward the overall value of the company. These noncurrent assets can generate long-term success for a business, but they are not typically used to fund general operations.

  As reflected in the sample balance sheet below, our bookstore, Retold Tales, has current assets of $137,000 in inventory, $50,000 in cash and $28,000 due from customers. Its long-term assets include one retail location and a warehouse, valued cumulatively at $325,000. Its total assets would be all of these values combined, or $540,000.

• Examples of Liabilities

  Like assets, liabilities are classified as current or noncurrent.

  • Current liabilities are obligations that the retailer must pay within a year, such as short-term debt, accounts payable, wages and taxes. Retailers must monitor their revenue and ensure that they have sufficient cash flow to cover these liabilities.
  • Noncurrent liabilities are long-term obligations, such as leases, loans or bonds, that are due more than one year out.

  According to Retold Tales’s balance sheet (see below), it owes $75,000 in wages, $19,000 for a line of credit and $41,000 in vendor bills, all due within one year, and another $275,000 for long-term loans. This brings the company’s total liability to $410,000.

• Shareholders’ Equity

  Shareholders’, or owner’s, equity is the value of the retailer’s assets after all liabilities are paid. This is considered the overall net worth of the company and represents the value amount that belongs to shareholders. On the balance sheet, equity may be categorized as share capital (the amount contributed by shareholders through share purchases) or retained earnings (the profits not returned to shareholders but held for future reinvestments). If equity is negative, the company may need to consider outside financing in order to meet its obligations.

  Retold Tales Inc.
  Balance Sheet
  For the Year Ended December 31, 2022

  Assets
  Current
  Cash	$50,000
  Inventory	$137,000
  Accounts Receivable	$28,000
  Total Current Assets	$215,000
  Noncurrent Assets
  Property, Plant and Equipment	$325,000
  Total Assets	$540,000
  Liabilities
  Current Liabilities
  Wages	$750,00
  Short-Term Debt	$19,000
  Accounts Payable	$41,000
  Noncurrent Liabilities
  Long-Term Debt
  Long-Term Debt	$275,000
  Total Liabilities	$410,000
  Shareholders' Equity	$130,000

Cash Flow Statement

A cash flow statement tracks a retailer’s incoming and outgoing cash and cash equivalents over a set financial period. This is a critical document because it demonstrates the company’s ability to pay its expenses, including wages, production costs, loan payments and vendor bills, and to invest in growth. Retailers that sell to customers on credit must account for the lag between when a sale is made and when the revenue is in hand. If they don’t manage this gap and take steps to create efficient accounts receivable processes, they can fall behind on their bills, even as sales increase. Tracking cash flow also helps retailers effectively estimate how much liquidity will be required to weather a downturn or slowdown.

The cash flow statement comprises three main components:

1. Operating Activities

   Operating activities cover cash exchanges from current assets and liabilities related to the retailer’s core business operations. They include cash inflows, from product sales made in cash and by credit, and interest received on assets, as well as cash outflows, such as for sourcing products, paying wages and other day-to-day expenses. Operating activities can be either direct cash factors — such as inventory spending and adjustments to sales and expenses from accounts receivable and payable — or indirect, such as asset depreciation.

   While occasional negative operating cash flow might be expected during periods of heavy spending or inventory/business expansion, ongoing negative cash flow can signal that a retailer’s primary business processes are inefficient and need to be reviewed, if the business is to remain solvent.

2. Investing Activities

   Investing activities include all incoming and outgoing expenses from investments, including equipment purchasing and selling, interest generated from loans given by the retailer, and payments from mergers and acquisitions — any of which could have a sizable impact on cash flow for that financial period. Negative cash flow from investing activities is not necessarily a drawback, as it can point to a retailer expanding its assets and investing in the future. On the other hand, it can also indicate an overextension, if the investments are above what is sustainable from operations and financing.

3. Financing Activities

   The financing activities section of the cash flow statement shows cash coming in from and going out to owners, creditors and lenders in the form of loans, credit lines, dividend payments, issued bonds and stock repurchases, to name a few sources. This section of the cash flow statement often needs additional context before it can speak to the strength of a business. For example, a retailer may have a high, positive cash flow from financing activities, indicative of an expansion of assets and a healthy external investment in the company. However, it could also signify an overreliance on debt to fund the business, rather than doing so through successful operations and sales. On the flip side, a negative financing cash flow is not necessarily unwelcome news if it means the retailer is paying down long-term debt, which can increase its liquidity and strengthen its future, even if it strains cash flow now.

   It is important to view the cash flow statement in the context of the retailer’s overall financial health and performance to understand when and where cash is being used effectively and where cash flow is falling short.

   Retold Tales Inc.
   Cash Flow Statement
   For the Year Ended December 31, 2022

   Operating Activities
   Net Earnings	$665,000
   Additional Cash
   Depreciation	$100,000
   Change in Accounts Payable	$40,000
   Subtractions to Cash
   Change in Accounts Receivable	$10,000
   Net Cash From Operations	$615,000
   Investing Activities
   Real Estate Purchases	$400,000
   Financing Activities
   Short-Term Debt	$30,000
   Long-Term Debt	$15,000
   Cash Flow for Year Ended Dec. 31, 2022	$230,000
   Cash at the Beginning of the Year	$1,750,000
   Cash at the End of the Year	$1,980,000

Challenges in Preparing and Interpreting Retail Financial Statements

It can take days, if not weeks, for retailers to manually compile and organize all of the necessary data to create their financial statements. But today, many use financial software to track, generate and analyze their company’s financial information, often through user-friendly dashboards that can quickly and effectively give users the data they need. Nevertheless, retailers should keep the following points in mind when interpreting their financial statements.

• Inventory Valuation Methods and Their Impact

  Calculating the current value of merchandise can present challenges to retailers selling diverse goods. Many rely on the retail inventory method (RIM), which assesses the average cost of inventory relative to its price markup to determine the value of their on-hand stock. RIM is used to estimate COGS and inventory values when markups are consistent across an organization or products are grouped together, as for cosmetics.

  Alternatively, some retailers, especially those with high-end goods sporting unique markups, like jewelry, evaluate their inventory based on the items’ individual costs. This “cost” valuation method requires more complex calculations than RIM because the goods are weighted individually, but as more retailers switch to accounting software and more sophisticated business platforms, it has become more commonplace than it was in the past.

  Depending on the method used, a retailer can produce different values for its inventory, which changes the value of assets on its balance sheet and influences the overall worth of the company.

• Seasonality and Its Effects on Retail Financial Statements

  Many retail businesses experience seasonal fluctuations in both their sales and their expenses, which can complicate comparisons and analyses of financial statements. A retailer specializing in holiday gifts, for example, may have negative cash flow and net income during the summer months, while it builds up inventory, but then make up for that deficit in the winter, funding its yearlong operations with the holiday sales bump. This inventory buildup will also be reflected on the balance sheet, as assets are bolstered during the slow season, especially if the business takes on additional loans and liabilities during this time.

  A direct month-to-month comparison of financial statements, either internally or relative to other retailers, may not be helpful without providing seasonal adjustments. Any party analyzing these statements may gain better insights by reviewing averages or by comparing them to past, seasonally adjusted statements, whether by previous quarter or year to year. A retailer also needs to be mindful of seasonal adjustments when deciding how to allocate inventory and forecasting future budgets and demand. The same is true if it seeks external funding from lenders, creditors or investors, because its most recent financial statements may not reveal its complete financial picture. In that case, it’s a good idea for the retailer to provide additional statements and information to contextualize the ebb and flow of its financial performance.

• Accounting Standards and Regulations

  For large public companies, financial statements must meet specific accounting principles and standards and follow Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS), depending on where the company is located. Adherence to these guidelines — which address revenue recognition, inventory valuation, lease accounting, materiality and more — ensures transparency and consistency in reporting, across all retailers. Companies following GAAP guidelines are also required to publish additional annual financial statements, such as the statement of retained earnings, alongside the three discussed above.

  Private retailers that aren’t required to report their financials may still decide to prepare financial statements to better analyze their operations, guide decision-making and simplify information-sharing with interested parties, such as investors. Financial statements are also useful when striving for accurate internal and external comparisons and for scenario-modeling.

  Retailers unsure about financial management requirements may prefer to consult an accounting or tax professional. Many large retailers rely on accounting software to be sure they are meeting current compliance regulations, especially those operating in several locations that may have different rules.

Manage All of Your Financial Statements in One Place With NetSuite

Retailers must build their businesses around their customers’ needs and create experiences that attract new buyers and keep them coming back. With NetSuite for Retail, retail businesses can integrate their web, mobile and in-person shops to create an omnichannel operation that allows customers to easily buy and return goods in the ways they prefer. NetSuite also provides retailers with up-to-date financial data and insights to ensure that business leaders are making well-informed decisions when planning inventory, managing orders, allocating resources and more.

NetSuite’s Financial Management solution is a cloud-based platform that can improve budgeting and forecasting through real-time visibility of financial data, wherever accountants and analysts are, to ensure that everyone is on the same page and working toward the same goals. Through quick and accurate financial statement generation, retailers can spend more time improving operations and responding to what’s happening now, rather than crunching numbers from last quarter. With NetSuite, retailers can better deliver for their customers, while building long-term success.

Modern retailers must be able to keep up with rapidly changing customer demand and market dynamics. To effectively meet these challenges, retailers must have a detailed understanding of their finances, and regularly generated financial statements — such as income statements, balance sheets and cash flow statements — can give retailers greater visibility into where their money is coming from and where it is going. Effective financial reporting paints an accurate picture of financial health, especially when viewed alongside previous reporting periods. These reports also help decision-makers plan for the future with well-informed decisions, sustainable growth practices and better resilience as demands shift and industries evolve. Maintaining regular, accurate financial statements can give retailers both transparency into today’s finances and the confidence they need to effectively deliver goods and services for tomorrow’s customers.

Retail Financial Statements FAQs

What is the financial statement of a retailer?

Retailers rely on three major financial statements. The income statement, or profit and loss (P&L) statement, calculates net income for a specific financial period. The balance sheet shows a company’s financial position up to a set time by comparing assets, liabilities and shareholder equity. The cash flow statement shows how much cash has gone into and out of the business over a given period. Together, all three statements paint a picture of a retailer’s financial health for the time period just ended.

What is the P&L of a retail store?

As the name implies, the profit and loss (P&L) statement, also known as the income statement, shows the cumulative profit or loss for a retail store over a particular financial period. It does this by combining revenue, expenses, gains and losses over the period to arrive at the bottom line of the statement: net income. A positive bottom line means the retail store was profitable; a negative bottom line means total expenses exceeded total revenue.

How is technology changing the way financial reporting is done in retail?

Technology, in the form of financial management and accounting software, has enabled retailers to generate financial statements quickly and accurately, rather than having to manually record and calculate their financials in books or spreadsheets. This lets analysts and decision-makers work with more up-to-date and reliable information when reviewing previous financial periods and planning for the future.

How does a cash flow statement differ from an income statement in retail?

An income statement tracks revenue and expenses, while the cash flow statement tracks incoming and outgoing cash. While these may appear similar, retailers operating on credit terms — either offering them to customers or receiving them from suppliers — may be earning revenue and accruing expenses at different times than it receives the actual cash exchange associated with the transaction. Both statements are necessary to gain a full picture of a business’s success.

What are the five basic financial statements?

The five basic financial statements are the income statement, to show revenue, expenses, gains and losses; the balance sheet, to show assets, liabilities and equity; the cash flow statement, to show incoming and outgoing cash; the statement of retained earnings, to show historical profits that have not been paid to owners; and a separate set of notes to add context to the other financial statements.