A standard business practice offsets future costs by funding a reserve for returns – but many small businesses don’t do it
In my 30-plus years of being an accountant I have learned many business lessons from people who were much smarter than me. Jerry Crawford was one of those people. Jerry taught me about product returns.
Jerry – who sadly passed away a decade ago – sold carpets wholesale from a nondescript little building in south Jersey. He employed about 50 people and counted many local and national carpet retailers as his customers. When I reviewed Jerry’s books, I noticed a large reserve for “returns”.
“They’re a part of every business,” he told me.
A “reserve” is something businesses create for potential future costs. Some reserve for bad debts. Others reserve for inventory that grows old and will need to be disposed of. And plenty of businesses – like Jerry’s – reserve for the potential costs that will be incurred if a customer returns their product.
Returns are just a normal part of business. Plenty of small business owners like Jerry go to great lengths to make the process as easy as possible. Some big companies, such as Amazon, do the same.
“There’s a cost to do this,” Jerry said. “So I make sure to build a reserve for that cost.”
Makes sense. And yet, it seems that many businesses still haven’t learned this lesson.
According to the Wall Street Journal, many Americans are complaining that it’s getting harder to return things. They’re seeing “surprise fees, shorter return windows and more questions about their reasons for sending products back”. Some, according to the report, are “getting warnings that they won’t get a refund on their next return”.
Jerry would be shaking his head at this. To him, it wouldn’t make sense. And it doesn’t make sense to me either.
Yes, there are a few bad actors that will take advantage of the practice. And yes, accepting returns adds costs for a business. But, like credit card fees, health insurance and overtime, this is a cost that can easily be recouped. All you need to do is capture those costs over a year or so, build a history, estimate what the next year’s cost will be and then factor those costs into your overhead. Your overhead is then factored into your pricing.
In Jerry’s case, he reserved one half of 1% on each of his sales as a returns allowance based on his history of returns. He built up this reserve throughout the year, then charged returned products against it. A .5% reserve meant that instead of charging $1,000 for a roll of carpet, he charged $1,005. His customers didn’t notice the $5 difference. Would you? The difference is negligible. But for a business, those costs add up and, by doing this, those costs are covered.
You’d think that, after thousands of years of business practice and the knowledge of some of the finest institutions, pundits, academics and experts, our business leaders today would understand this concept. So why don’t retailers realize this? It’s a mystery to me.
They must see that creating obstacles and charging their customers for returns only creates animosity, ruins their loyalty and results in unfavorable press coverage. It’s shocking to me how businesses continue to make the same mistakes over and over again, despite the lessons of history.
You can keep your customers happy, build loyalty and grow your business by not nickel-and-diming them. Jerry Crawford, a small business owner with a high school education who profitably sold carpets for decades, understood this.
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