Almost all retail based operations require a Point of Sale (POS) System to properly record the customer and product activity. 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. 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.
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.)
- 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
- Methods of Payment
- Produce Purchase Orders
- Matching of Purchase Orders to Invoices
- Out of Stock Reporting
- Delivery Issues
- Special Reports
- 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.
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 – Point of Sale System
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.
Do you want to learn how to get returns like this?
Then learn about Value Investing. Value investing in the simplest of terms means to buy low and sell high. Value investing is defined as a systematic process of buying high quality stock at an undervalued market price quantified by intrinsic value and justified via financial analysis; then selling the stock in a timely manner upon market price recovery.
There are four key principles used with value investing. Each is required. They are:
- Risk Reduction – Buy only high quality stocks;
- Intrinsic Value – The underlying assets and operations are of good quality and performance;
- Financial Analysis – Use core financial information, business ratios and key performance indicators to create a high level of confidence that recovery is just a matter of time;
- Patience – Allow time to work for the investor.
If you are interested in learning more, go to the Membership Program page under Value Investing section in the header above.
Join the value investing club and learn about value investing and how you can easily acquire similar results with your investment fund. Upon joining, you’ll receive the book Value Investing with Business Ratios, a reference guide used with all the decision models you build. Each member goes through three distinct phases:
- Education – Introduction to value investing along with terminology used are explained. Key principles of value investing are covered via a series of lessons and tutorials.
- Development – Members are taught how pools of investments are developed by first learning about financial metrics and how to read financial statements. The member then uses existing models to grasp the core understanding of developing buy/sell triggers for high quality stocks.
- Sophistication – Most members reach this phase of understanding after about six months. Many members create their own pools of investments and share with others their knowledge. Members are introduced to more sophisticated types of investments and how to use them to reduce risk and improve, via leverage, overall returns for their value investment pools.
Each week, you receive an e-mail with a full update on the pools. Follow along as the Investment Fund grows. Start investing with confidence from what you learn. Create your own fund and over time, accumulate wealth. Joining entitles you to the following:
- Lessons about value investing and the principles involved;
- Free webinars from the author following up the lessons;
- Charts, graphs, tutorials, templates and resources to use when you create your own pool;
- Access to existing pools and their respective data models along with buy/sell triggers;
- Follow along with the investment fund and its weekly updates;
- White papers addressing financial principles and proper interpretation methods; AND
- Some simple good advice.