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David Geller

Can You Make Money at 12 Percent Margin? Yes, But Here’s What It Takes

As one factor decreases, another must increase.

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CAN YOU MAKE a living on a profit margin of just 12 percent? Did the word no come to mind? You’re wrong.

For coin or bullion dealers, 8-12 percent gross profit margin is the norm, and they make a lot of money with little debt.

The “magic triangle” includes profit margin, inventory turn and inventory level. The combination of all three tells your future in a store, how much money will be left over to pay all bills and have money in the bank.

Let’s take a simple store math example for a year using keystone. A typical jewelry store would have a net profit of 5 percent. Here’s how a P&L would look:

Total Product Sales: $500,000
Cost of Goods: -$250,000
Gross Profit: $250,000
Expenses (45%): -$225,000
Net Profit (5%): $25,000

Are you making money? Absolutely. Do you have any money left over after paying expenses? Depends.

Imagine if last year, you sold everything at Christmas, not a stitch of inventory left. January 2nd, you fly to New York with three suitcases and buy the $250,000 of inventory that the cost of sales above pays for. You’ll have no debt. If something sells within six months, you have the money to reorder the replacement for the case, thus always having a stocked showcase.

Divide $250,000 in cost of goods by inventory of $250,000 and you get one turn a year.

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Now assume the same figures above, but instead of three suitcases costing $250,000, you bring five suitcases and bring back $600,000 of inventory for the store. Same sales and profit numbers as before. Did you make a profit, make money? Yessiree Bob! Do you have money? No! You bought $100,000 more inventory than the sales you took in. So how do you pay for it?

  • Owe vendors way past the due date
  • Put it on credit cards
  • Go to bank and take out a line of credit
  • Personally skip paychecks
  • Take money from your personal checking accounts

In this scenario, your inventory is $350,000 higher than the cost of goods sold. Divide cost of goods by inventory level, and it shows you have a 0.41 turn. A turn of 0.41 means this store has more inventory than needed for two years.

So, what’s the secret to having money?

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The long and short of it is, if you’ll keep your inventory levels approximately equal to the gross profit dollars you’ll make over a year, you’ll both make money and have money.

The lower the profit margin, keep inventory lower, or if you must have a higher inventory level at lower margins, then turn it faster. Instead of taking 12 months to sell it, sell within nine.

It takes all three for The Magic Triangle to work magic in your store!

David Geller is a 14th-generation bench jeweler who produces The Geller Blue Book To Jewelry Repair Pricing. David is the “go-to guy” for setting up QuickBooks for a jewelry store. Reach him at david@jewelerprofit.com.

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David Geller

Want to Raise Repair Prices? Train Your Staff to Sell Them First

Confidence and knowledge will convince clients it’s worth it.

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A JEWELER ONCE TOLD me, “Our unspoken principle in the shop is that we do not want anyone to think they have paid too much for a repair.” I get your point, but how does a jeweler know that a customer is about to pay too much? That’s a jeweler’s brain, not the customer’s.

I’ve visited many stores and connected to their books, and I usually see that their shop numbers are too low. When I tell them their prices are too low for the work, many will say, “My customers won’t pay.”

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How do you know? How many times did you ask? And how many really said “no” before you decided that the price was too high?

Before we decide on a metric for determining your repair pricing, let’s look at your expectations of selling out of your showcase. If you see 10 customers and only three buy, you don’t think you failed in selling, even though 70 percent of those people walked! Fail or not, you have decided a 70 percent walk rate is good because “I sold a few pieces.”

Now, let’s look at selling repairs. Repairs typically have a 90 percent closing rate because repairs are not price-sensitive. What if you charge more and the closing rate drops to 80 percent, and you now at 80 percent take in more money than you did at 90 percent? Are you charging too much? Why not work less and make more?

Even if your repair closing ratio hits 70 percent (I see this all the time), it’s never ever that you’re charging too much.

The staff’s selling skills suck because they think you charge too much or they are not explaining to the customer the difficulty and expertise required in this repair. (And yet, even at 70 percent closing ratio, you’re doing twice as well as selling from the showcase.)

In 1986, I did $830,000 in sales, of which 75 percent was from our shop. I had a 95 percent closing ratio. But we were failing due to debt. Our prices were too low, among other things.

That’s when I wrote the Geller Blue Book. Once printed and used, our closing rate dropped a bit because we were all scared of quoting these much higher prices. After I started sales training and I personally went to a Harry Friedman class (on being a sales manager and trainer), our closing ratio went back up and sales went up.

Every time I have spoken at a jeweler’s meeting, I ask the attendees, “What do you charge to size a typical 1-carat, six-prong, 14K yellow gold engagement ring smaller?” Their answers range from $22 (yes, 22) all the way up to $65 and even once $85 dollars.

Guess what? All of them achieved a 90 percent closing ratio, and none of them thought they were overcharging.

People will pay for quality work, and charging more is the only way to fix the shop’s profitability, which should be keystone or better. Of course, you can lower the jeweler’s pay, but I don’t think that would go over well.

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David Geller

Here’s What’s Really Keeping Jewelers From Having More Money

If you think it’s low margins, you’re wrong.

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I WAS READING THE Big Survey in last month’s issue of INSTORE, and one question popped out at me: “What will be your greatest priority next year?”

Thirty one percent of respondents said, “Boosting profitability.” The money-savvy ones (21 percent) said, “Clearing old inventory.” Most jewelers just don’t get that there is a big difference between making money and having money.

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Someone once taught you that margin was your most important metric. Yep, that was a good thing when everyone made two and three times key, but no more. What hampers you from having money is not low margins as much as inventory level.

Your debt typically equals one-half to three-quarters of your inventory that’s more than a year old. It shows up as accounts payable, credit card debt, lines of credit, and money owed to you (the owner) for money you’ve personally loaned the company.

Having money depends on your ability to keep that debt to a minimum. How can you do that? As a jewelry store/shop owner, there are a few options.

  1. Repairs. This is a revenue stream that requires very few resources to produce income. Your ongoing costs are findings, small stones and your jeweler’s paycheck (plus the occasional equipment upgrade).
  2. Buying scrap. This really only requires several thousand dollars of cash on hand to make a profit. Buy it on Monday, mail it on Wednesday, get a check on Saturday and you’ve made a profit and replenished your cash to do it again.
  3. Inventory sales. This is likely your biggest cash outlay, and it needs to throw off revenue monthly. All of it must throw off revenue at least once a year. All of it. You can’t wait two and three years to have money come in to pay a bill or check tomorrow.

Look at 1 and 2 above. The amount of money required is small. You don’t keep scrap very long and most people order “just enough” in findings for jobs this month, maybe a few extra items.

But inventory piles up for years and causes debt. In a jewelry store, your average inventory level should be somewhere between your cost of goods sold and gross profit amounts for a 12-month period. Any amount above that will show up as debt and poor cash flow.

Keeping inventory within these two numbers (give or take) will increase positive happy cash flow, increase your checking account balance, lower total overall debt, remove stale and outdated inventory, and may actually increase sales as you have more leverage to buy new fashionable jewelry that pleases your customers.

That would be a good thing, right?

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David Geller

What You Can Learn About Turn from Clothing and Furniture Stores

Hint: Turn more, earn more.

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THERE ARE REALLY only three important numbers in a retail store: gross profit dollars, inventory on hand, and inventory turn. So who’s better at managing money among these three retailers?

Store                         Gross Profit %
Jewelry                      42.6%
Furniture                  45.0%
Clothing                    46.5%

Darn close, aren’t they? The grass isn’t so green on the other side after all. Or is it?

Let’s look at inventory turn, which means how many times a year an item sells. (These numbers are from stores doing “pretty well.”)

Store                            Turn            Days in the Store
Jewelry                   1.4                       260
Furniture               3.5                       104
Clothing                 4.3                       84

A clothing store won’t keep a shirt/suit/jacket/blouse in the store more than three to four months. They will heavily discount it at that point to get it out the door; they don’t just “squash” merchandise closer together to show more like jewelers do.

Furniture stores work the same way. They have a natural problem: available floor space. The biggest reason for high turn in a furniture store was told to me by a furniture store owner: “Where am I going to store an extra 100 mattresses?”

Clothing stores get rid of their merchandise every quarter. Furniture stores get rid of their inventory every four months, and a good jeweler turns their merchandise a little over once a year. But most jewelers I meet have had their total merchandise for two-and-a-half to four years! This causes terrible cash flow and piles of debt.

If you buy jewelry in January, it should sell at least once by Christmas; that would be a turn of 1.0. If it stays until after Christmas, discount it or give a spiff to the sales staff to unload it, or even return it to your vendor and exchange it.

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If it is still there in 18 months, scrap it. That’s what clothing and furniture stores do.

Let me show you the money-making power of turn. All three stores are going to buy an item for $200. For a jeweler, this might be earrings; for a clothing store, a nice jacket; and for a furniture store, it might be a chair. In the table below you can see the cost, profit margin in dollars, and what that brings in for total product dollars in a year.

Keeping an item long-term is a detriment. Even if someone buys it three years from now, you should have had that $207 in profit for each of the three years, totaling $621 brought into the store (not the measly $163.35 you would make by holding it three years).

When it’s over a year old, most things need to be disposed of and replaced. Maybe your customers just aren’t buying what you have in stock. Change that!

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