Accounting can sometimes be a funny old game - quite often it’s funny when the accounting system produces negative figures. Some of these are pretty obvious, and actually most of them aren’t funny at all.
Take ’negative gross profit’ for example. It means exactly what it says - you’ve actually lost money on that sales transaction. The goods sold have cost you more than you’ve received for them. Trying to find out why that’s happened means looking at several possible factors. Start with the obvious - was the sales price lower than the purchase price? Did you remember that there might have been 17.5% VAT to come off your retail sales value? If the pricing looks okay, what about the stock movement? Have you actually counted the goods into stock and out (as sales) again, and were there any missing? Perhaps surprisingly, many retailers will ignore negative gross profit on any given sales line from time to time, assuming that it will reverse itself (into a positive) next time around, which it often does, especially when the stock counts were a bit sloppy. Rather more surprisingly, some retailers tend to ignore negative gross profit on a fairly continuous basis.
More problematic to explain are negative stock figures. We tend to see a lot of these, usually where there’s a fancy POS/BOS system with stock management software that is supposed to take care of the stock levels for you. Unfortunately while these systems are able to keep track of individual items sold out of the shop, they do rely on some input from the retailer in order to maintain accurate stock records. Things like regular physical counts to correct for damaged/obsolete/stolen stock, and correct analysis of purchases into the system. That means that if your stock system has 999 separate sales categories you will need to analyse each line from the purchase invoice into the equivalent correct sales category. Needless to say, even with some of the electronic assistance available these days, both of these activities are the sort of time-consuming chores which have been relegated to ’when you have a bit of time’ on site. Hence many retailers forget to enter purchases into their stock system, but the POS still faithfully records each sale. Result? Well, if you started the month with 50 Mars bars, and sold 150 during the month, but didn’t enter any of the deliveries into stock, you’ll end up with a stock of minus 100 at the month end. The stock system will happily convert that negative stock quantity into a negative value for your accounts. So what’s the problem? Well, for a start, a negative stock figure simply looks very ’odd’ and counter-intuitive when stock is one of the few things in the accountant’s world that is actually supposed to have a tangible reality in the everyday common-sense world. If it’s bad enough trying to conceive of what ’minus 50 Mars bars’ means in your management accounts, wait until your year-end and try to explain a total stock of "minus £13,879" to HMRC! It may sound ’funny’ and might even get a laugh down at the tax office - but many accountants are now finding that clients are submitting end-of-year accounts with large negative stock values, and that can cause some enquiries to commence down at the Revenue.
The most fundamental element in the accountants’ negative universe is that of the ’negative net worth’ of a business or individual. This is seriously not funny. Although some will say that this is a gross over-simplification, negative net worth is a sign that your business is in the process of dying. What ’negative net worth’ means for an individual retailer is that you will have to pay some of your own money back into your business - to your creditors - before you can walk away from it. It means that all of the existing assets in your business are still not enough to pay all of the bills and borrowings that the business has run up. However, business death is not all-or-nothing, it happens in degrees. You can come back to life if you have the right help and resources. To achieve such resurrection you need to refinance. Often that means remortgaging your house. That’s fine, if you’ve got the equity - but remember that if you don’t correct the underlying disease then the respite will be temporary. You’ll end up even further into the negative universe and this time it’ll take your house along with your business. The longer you stay on the negative side the more painful the end.