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Point of Sale System – Introduction

Almost all retail based operations require a Point of Sale (POS) System to properly record the customer and product activity.  So what is a Point of Sale System?  How is it set up?  What information should we get from this system?  How does a small business owner benefit from this system?

The sections below answer these four questions.  This article introduces the reader to concept of the POS system and the value the system brings to you.  Later articles will introduce you to the different technologies available and their respective advantages and disadvantages.

What is a Point of Sale System?

Every business owner wants to know which product sells the most, which customer(s) buys frequently, how much inventory is on hand, what method is preferred by customers when paying (cash, credit, checks or debit) and how much did we actually sell on a particular day.

A point of sale system is designed to provide this information to the business owner.  The largest retailer in the United States has their own point of sale system.  Walmart knows exactly the volume of sales on any given day and during any point of the day.  Using this information, they can predict with clarity how many cashiers they will need for certain hours on any given day of the week.  Think about this for a minute, it reduces labor costs because they can open up the proper number of registers and not bring in too many cashiers reducing labor costs.  In addition, by having the proper number of cashiers during heavier periods of time, customers will refrain from the leaving the store because the lines are too long.

Have you ever wondered how the news caster can quote the actual volume of sales from those heavy weekends of shopping?  Well, they get their information directly from the retailers that use point of sale systems that provide minute by minute updates in total sales nationwide.  Walmart’s system feeds all the transaction activity from all the stores into a central point and compiles the data to the penny.  Using comparative tools, they can compare to prior years for stores open more than a year; they can forecast the expected volume based on the trending information.

But for the small business owner, he is more interested in wanting to know how much was sold today and how were those sales paid.  A POS provides this information.  The system tabulates the entire day’s sales and reports the form of payment.  So if the report states that sales were paid via two forms, so much in credit cards and so much in cash, the cashier should have that amount of cash in the till box at the end of the day.  This allows for easy till box reconciliation at close of business.

In addition, the POS will document via the UPC numbers how many of each product was sold.  If you have regular types of customers, you can even determine which customers purchase the most.  Examples of this include your large home material suppliers.  Many small contractors carry accounts with Home Depot and Lowes.

How is Point of Sale Setup?

In general there are two parts to a POS system.  The first is the hardware.  Typically this includes a cash drawer, a computer, a scanner (wand) and a credit card reader.  Hardware will run around $1,500 per station or register in your store.

The second part is the software. The software is programmed to meet your respective needs.  In general, a database of the inventory is loaded into the software by scanning the UPC on each product you sell and you tell the software the cost per unit and the number of units on hand.  In addition, if you have regular customers, you can load their respective data into the software too.

Software can range from around $1,700 at the low end to millions of dollars.  Of course, the key is the type of information you desire.  In those business operations that have many stores and a broad base of customers, your software will be more expensive.  In addition, if your inventory process becomes more complicated whereby you take raw resources and then turn this into an assembly of some sort, the software will require more coding to assist you in achieving great information at the end of the day.  Future articles will compare different POS software to your respective needs.

Once the hardware and software is installed and the databases updated, you are now ready to use the system and get the information you need.

Information Output

A good POS system should provide you with the following information:

  • Total Sales Volume for any given time period requested (hourly, daily, weekly, monthly etc.)
  • Inventory
    • Sales Volume by Item
    • Sales Volume by Type
    • Remaining Inventory Balance by Cost or Retail
    • Reorder Points
    • Inventory Sold in Cost
    • Customer Information
      • Location of Customers
      • Types of Customers
      • Volume by Customer or Customer Types
      • Top Customers
      • Discounts Allowed for Customers
      • Returns
      • Methods of Payment
        • Cash
        • Check
        • Credit
        • Debit
        • Purchasing
          • Produce Purchase Orders
          • Matching of Purchase Orders to Invoices
          • Out of Stock Reporting
          • Delivery Issues
          • Special Reports
            • Promotions
            • Discounts
            • Taxes
            • Layaways
            • Gift Certificates

Benefits for the Small Business Owner

My brother owns a liquor store and he uses a POS system.  He primarily is interested in the total sales for the day and the tax obligation.  Some of the customers are tax free based on the way the tax laws work in his state for the products he sells.  But interestingly by playing around with the software his able to get some other information that is very beneficial to him.  On the inventory side of the equation, he breaks his inventory out into three distinct groupings and is able to identify which group sells more during certain times of the year.  As an example, wine increases as a percentage of his sales during the holiday periods.  Champagne sales go up in May and June due to more weddings.  With this information, he is able to order the proper volume of items in preparation for the particular times of year.

In addition, the software reports confirm his intuitive belief in certain trends for the products he sells.  In a typical day, 50% of his sales occur in the last 2 hours of each day than in the first 6 hours he is open for business.  This makes sense as most folks stop on their way home to buy alcohol.

Finally, he has reorder points for certain items that are regularly sold; he monitors margins on the product so as not to lose profitability for his respective products.  When inventory is received from the suppliers, the software identifies any price changes and he is able to change the price on the fly and reprint a shelf tag with the new price.

So his POS system delivers not only financial information, it provides him with production information too.  By using this information he is able to control costs and increase his profits for the year.

Summary

A good POS system provides great information to the small business owner.  From daily sales volume to inventory information, all this data helps the small business owner increase profits and reduce stress.  POS systems have a hardware component and a software component.  You should expect no less than a cost of $3,000 for a single station (register) and the price can get very expensive depending on the nature of your business.  Most of the output information centers on sales volume and inventory issues.  In addition, the small business owner can get his tax information (Sales, Retail, and/or Revenue Taxes) and customer information (location, types, volume issues, product preferences).  With this information a small business owner receives many benefits including highly specialized intelligence.  Act on Knowledge.

If you have any comments or questions, e-mail me at dave (insert the usual ‘at’ symbol) businessecon.org.  I would love to hear from you.   

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About David J Hoare (389 Articles)
I spent 12 Years as a Certified Public Accountant, Over 20 Years of Practice in Accounting and Consulting, Controller in Management of Closely Held Operations, Masters of Science in Accounting, Prepared over 1,000 Business Tax Returns and Hundreds of Individual Returns

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