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David Geller

David Geller: Book Club

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David Geller shares the secrets of organizing your books to show what areas of your business are really making money.

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[h3]Book Club[/h3]

[dropcap cap=Y]our goal for the year: for the first time, ever, to really know how well your store is doing. Knowledge is pure gold. And knowing what areas of your business make you money lets you run it more profitably with less stress.[/dropcap]

To figure it out, you’ll need to correctly set up your point-of-sale or accounting software. Some POS programs have an accounting program installed with it but, if not set up properly, it’s just “mish-mosh” numbers. This article is the first in a series of how to set up QuickBooks for Jewelers. But you can apply this strategy to whatever program you use, whether it’s Peachtree or your POS accounting program. (As a QuickBooks Pro Advisor, I just find QuickBooks to be the easiest program to use.)

[h4]Let’s begin: First, a jewelry store should have its POS system and accounting program divided into three major income sales divisions.  
Showcase Sales: Sales of merchandise that we own. Our stuff.
Special Order and Memo/Consignment Sales: Sales of merchandise that we don’t own.  
Shop Sales: Repairs, custom design, appraisals, engraving watch repairs.[/h4]

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Most stores have one income account: Sales Revenue. This does you no good. You’re a jeweler — you’re special! And you have to organize your books in a special manner.

[h4]To go with these three sales divisions, you will also need to create three matching “Cost of Goods” accounts:

• Showcase Sales Cost of Goods
• Special Order/Memo Cost of Goods
• Shop Cost of Goods.[/h4]

These cost of goods numbers come from the POS program. “Cost of Goods” for merchandise is not entered when you enter a bill or pay for the merchandise. “Cost of Goods” is arrived at on the day the piece is sold.
(Important point: most jewelers pay for merchandise and call it “Cost of Goods.” It is not a cost. It’s an investment in your business. Therefore it’s called an asset account — “Inventory Asset.”)

Continuing on … the Shop Cost of Goods does not come from the POS system. Most jewelers will scratch their heads, trying to figure out the cost of sizing the ring. If you pay the jeweler an hourly wage and then charge the customer a single price you’ll never know what your cost is. Stop trying to enter into your POS system the repair cost … because you don’t know it!

What you do know, on the other hand, is the weekly pay for the jeweler. So the only way to setup the shop in QuickBooks is to compare Weekly Shop Sales versus Weekly Shop Costs.

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You know how to get the weekly shop sales: just add up last week’s repair invoices.

Then, to calculate cost of goods for the shop, add the following: weekly gross pay for the jeweler (move his/her pay check up from “Payroll Expenses”); the matching taxes you paid on the jeweler; your share of his/her insurance; findings bought this week, repair stones, gold; shop supplies, gas and oxygen, buffs, etc.

Now you can see if the shop is profitable. In fact this is virtually the only way. It’s the way I set people up when I do store visits and, for the first time, they have black-and-white numbers for the shop.

Organizing product sales in the manner above lets you clearly identify your Gross Margin Return on Investment (GMROI). By setting up the two product groups (Showcase and Special Orders/Memo/ Consignment) we will be able to see, by category, if the items we actually own make us money based upon the store’s inventory, not based upon if we made money on individual sales. If you have $25,000 invested in wedding bands from Vendor A wedding bands, any sales made from this category should be listed as “Showcase Sales/Department WB.” You own these bands. If they don’t sell, you know it — not to mention, feel it.

[inset side=right]You’d probably be better off to drop Vendor A’s line and stock Vendor K instead. Or maybe get out of the wedding-band business altogether![/inset]Further, if a situation arises where you need to special-order bands from Vendor A (you don’t have the size she needs, customer wants more diamonds, etc.), you should still list these as Showcase Sales/Department WB. That’s because, even though this was a special order, you wouldn’t have made it without having that vendor’s inventory in your case. So the inventory did make you money — and that’s the performance standard we’re trying to find. (However, if you have to order the wedding band from a different vendor, let’s call him Vendor K, whose tattered catalog you have on hand for such situations, you should not list that sale as Showcase Sales. Instead, it should go under Special Orders/Department WB.)  

This is the best way of finding out how a category is performing from you. To show you how misleading figures could be if you organize your books any other way, take the following situation as an example: If you stock 24 vendor “A” bands and with those showcase sales and special ordering from that vendor you sell a total of 18 bands in a year, the turn would be low — you sold less than you stocked.

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But if you lump all wedding band sales into one single category called “Wedding Bands” (WB), the sale of an additional 30 special-order bands from that tattered catalog you keep pulling out will make the WB department look like it sold 48 bands (18 + 30) and you’d think your investment with wedding bands, and particularly Vendor A, was a good one. It wasn’t. You’d probably be better off to drop Vendor A’s line and stock Vendor K instead. Or maybe get out of the wedding-band business altogether!  

Next month, we’ll dive into this even further. We’ll continue to talk about how you actually enter your sales income into QuickBooks. It doesn’t come from enter the Visa/MasterCard entries either! That’s money — not sales. Those are two totally different things.

David Geller is an author and consultant to jewelry-store owners on store management and profitability. E-mail him at [email protected].

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

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