Have plans for all the money you received for selling gift cards over the holiday sales season? Not so fast, it’s not your money yet. . .
The gift card phenomenon began in the US about 30 years ago, and has continued its upward trajectory ever since, topping $124b (that’s BILLION!) in volume in 2014. Salons and spas are popular gift card destinations, and why not? You can have plenty of sweaters, but never too many experiences. As an industry, we’ve had a long learning curve in how to market gift cards, and much has changed from a legal perspective. In the beginning, we sold paper gift certificates that said “massage” on them; clients would stuff them in a drawer and show up to redeem them 3+ years later. Even though there may have been 2 price increases in between, they would still get their massages, at the old price. Unless your salon decided to enforce the one-year expiration, in which case you got to keep the money, but lost the potential client, who vowed never to do business with you. Now many states have amended their laws so that certificates never expire, and most businesses have moved from paper to plastic digital gift cards, but the model of a business receiving cash up front for a service yet to be delivered is still going strong.
I can remember when this craze really set in, in the late 80’s. We couldn’t sell gift certificates fast enough, renting extra computers and hiring holiday help to manage the long lines of purchasers during the month of December. It felt like winning the lottery, and after the dust settled, we would figure out how to best spend all of this cash; new carpeting, an updated piece of equipment, bonuses for the staff, the list was always growing. We knew it wasn’t really our money, but we also knew that a significant portion of those gift certificates would never be redeemed, so it felt safe. That is, until our weekly gift card redemption rate approached 50% of business, and August rolled around, creating a cash scramble to meet payroll.
The lesson is gift card revenues are not your money; they’re an indication of likelihood that someone will do business with you in the future. But not a promise. And when that gift recipient comes in to enjoy their Relaxation Massage or Scalp Treatment and Hairstyling, the gift card is just another payment method. As a consultant, I see a lot of income statements, and I am surprised how often I see gift card sales listed under revenue, where they don’t belong. Let’s examine some of the accounting implications.
According to GAAP (Generally Accepted Accounting Principles) which are followed by most qualified accountants and bookkeepers, gift card & certificate sales should be recorded as a liability on your balance sheet, and don’t show up on your income statement at all. The cash generated from the sales of gift cards should be put into an escrow account, separate from your regular bank account, and can be drawn upon as the gift cards are redeemed. This is similar to what should happen in the sales of series or packages, also.
Some accountants may handle this differently, especially if your salon business is operating on a “Cash” rather than “Accrual” accounting method. According to Monte Zwang, Principal of Wellness Capital Management, who handles accounting services for spas and salons, some CPA’s will leave gift certificate sales on the income statement of a Cash accounting business to more easily determine the net sold vs. redeemed revenue. Says Zwang, “I actually prefer to leave it on the balance sheet, even for Cash basis, so owners do not look at it as operating cash. If gift cards are recorded under revenue, as opposed to a Current Liability, you can’t look at your P&L and see how profitable you are. Sales is the money you are entitled to after you provide a service or sell a product. You will be overstating your sales if you record Gift Certificates as anything other than a Current Liability.”
As gift cards are redeemed, the supporting funds can be drawn out of the escrow account and put into regular checking, at least to the degree that redemptions outpace new purchases. Lisa Neufeld, Operations Lead at WCM, adds that “Outstanding liability on the balance sheet goes down, and cash goes up. At the same time, labor costs for performing service shows up on P&L and in the accounting world, you have just used the “matching principle;” matching revenue and expense in the period they actually occurred.” The services and products that are purchased with gift cards are recorded in revenue on the income statement, just like any other sale, so it is entirely possible you won’t see the word “gift card” on your income statement at all.
You should also be aware of your state’s laws on unclaimed property, or escheat. These laws provide a way for the state to recover some of the money lost if the gift card is not redeemed and a taxable sale recorded. The federal CARD Act, which mostly pertains to the handling of credit cards, is an underlying platform, and each state has their own regulations regarding when and if any unredeemed gift card funds should be transferred to their coffers.
Obviously, you’ll want to handle your own accounting situation in a manner that is both legal and beneficial for your business. As Zwang says, “Leaving gift card sales on the balance sheet means the Income Statement will be a better tool to see how the business is operating throughout the year. That is what the financial statements are for…to help clients make business decisions on a day-to-day basis: not to make it easy for the CPA to prepare the tax return!” Remember that swelling gift card sales also mean swelling liability on your balance sheet. Should you ever want to sell your spa or salon, any potential buyer will see that liability and want to know where the matching bank account asset is; if it doesn’t exist, your business value just shrunk accordingly. Gift card sales are an important tool to bring in new clients at certain times of year but must be handled properly so keep your salon business healthy.
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