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David Geller

David Geller: $100,000 Question

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If you’re not recording values when taking in a customer’s jewelry, you could be in for an expensive lesson, says David Geller.

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[h3]$100,000 Question[/h3]

[dropcap cap=C]ould you afford to write a check for $100,000? Yep, a check for $100,000 … right now, direct from your pocket, for no return.[/dropcap]

If you’re not, then read this column.

In my business, there are only a few things I always tussle with when speaking to store owners — and one of them concerns putting values on customers’ jewelry while it’s in your store in a job envelope.

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[inset side=right]Now’s the part where I jump into your head and tell you what you’re thinking.[/inset]I’d say over 75% of you do not give the customer a receipt with a stated value and description. You think it’s too much work and you don’t want to give out “free appraisals.” Many of you think you’re saving yourself by writing on the receipt “yellow metal, white stone” and either “no value” or “value is $75 or less”. And then you forget about it, thinking “Hey, they signed it!.” Dumb move!

Now’s the part where I jump into your head and tell you what you’re thinking. Look here, David. We can’t be expected to know what every customer’s jewelry is, whether it’s real or not. We’re busy. Funny, you wouldn’t let a supplier sell you goods that you didn’t inspect first, would you? You’re supposed to be an expert in the jewelry business … so be one.

The reason I asked if you could write a check for $100,000 for no return is that I just spoke to a jeweler who did exactly that.

He was burglarized. Despite the fact that he had a dial-up burglar alarm, a backup cellular phone, TL-30 safe and insurance. They came in from the roof, cut a hole, disarmed the phone lines and cellular backup. In addition, they destroyed the alarm bell so that when it did go off, it didn’t make any noise.

Obviously, these guys were professionals.

Then, without any fear of getting caught, they used a laser torch and opened the safe. Removed $325,000 in inventory from his safe. And took all 100 job envelopes — jewelry from the store’s customers that had been sent in for repair.

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After the investigation, the jeweler was reimbursed for the stolen inventory — every cent. That’s because he had a point-of-sale program which had each piece listed.

But he was was under-covered for his customers’ jewelry. Why? Because he never asked his customers the value of their jewelry.

That mistake ended up costing him 100,000 hard-earned dollars.

In his words: “Thank goodness we are a strong company, otherwise it would have put me out of business.”

Here’s how this jeweler handled take-ins in the past. (See if this sounds like you.) He used the coin envelopes with the numbered stub on top that is given to the customer. No description at all, and of course, no value. Phew! That approach makes take-in a breeze, doesn’t it? Sure, it does … but watch out, it might cost you $100,000.

And guess what? He was lucky … lucky it was only 100 job envelopes.

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Now he does exactly what I have been preaching for years.

[dropcap cap=1.] He bought three-part job envelopes from Impact Specialties (call 800-543-4264 or go to www.isiprint.com).[/dropcap]
[dropcap cap=2.] He fills in the description of every item in the envelope.[/dropcap]
[dropcap cap=3.] He gets a value from the customer, or corrects the one the customer states if it’s too crazy, or he tells the customer what it’s worth.[/dropcap]
[dropcap cap=4.] The customer gets one copy.[/dropcap]
[dropcap cap=5.] The second copy is removed for safe-keeping at an outside location.[/dropcap]
[dropcap cap=6.] That leaves the envelope, with the third copy and jewelry inside.[/dropcap]

Now he knows the values of all items in his store, periodically adding them up to tell the insurance company how much insurance he needs to cover his customers’ jewelry while it’s in his possession.

That’s the safe approach. So start training your staff to start getting values. Do it now… please, don’t wait until it’s too late.

Here’s how. After writing up a take-in form, ask: “What value shall I put on your jewelry while we have it in our store?”

Notice I didn’t ask the customer what their jewelry was worth. (The inevitable comeback from the customer would be “I don’t know, what do you think?”) If they answer that they don’t know, then ask if it’s covered under their homeowner’s policy or if they have an appraisal. Or ask if they remember what they paid for it.

If there’s still no answer, and they persist in trying to get you to tell them what you think, just say: “We’re not trying to do an appraisal, just having appropriate values for our insurance coverage.”  

Finally, if all else fails and no input is forthcoming, say “Well, in our store, this type of item is tagged for around $900. I’ll put that down if it’s OK.” Most times it will be.

[inset side=right]Notice I didn’t ask the customer what their jewelry was worth.[/inset]But what if the customer has a 3/4-carat round, J, SI2 and tells you the value is $15,000? No, don’t laugh into your fist and try to disguise it as a cough. Instead, briefly educate the customer as to what such an item would sell for in your store. If the customer won’t accept your value, you might have to (politely) tell them: “We are responsible for theft while in our possession but that amount is way beyond what we deem necessary. We’ll have to decline working on your ring. I’m so sorry.” That usually solves it.

Back in the day, my store did almost 9,000 jobs a year. And we never more than a half-dozen problems a year using this method.

So start now: get descriptions and values, keep receipts separate from job envelopes, and add values four times a year. And while you do it, repeat the mantra, “This will save me $100,000 … This will save me …”

David Geller is an author and consultant to jewelry-store owners on store management and profitability. E-mail him at dgeller@bellsouth.net.

[span class=note]This story is from the January 2005 edition of INSTORE[/span]

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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

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!

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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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