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David Geller

David Geller: Costly Mistake

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Understanding ‘cost of goods’ is key to determining the health of your business, says David Geller.

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[h3]Costly Mistake[/h3]

[dropcap cap=W]hat really is “cost of goods?” Most jewelers think “cost of goods” is the checks you write for product. Nope. If you are writing checks for products and calling it “cost of goods,” you’ll never know how your business is doing.[/dropcap]

So let’s get it straight — cost of goods is not the checks you write. It’s the cost of the item after you’ve sold it.

[inset side=right]Many, many jewelers set up their own books, and do it wrong.[/inset]

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In my job, I see a lot of people’s accounting systems. Many, many jewelers set up their own books, and do it wrong. Then their accountants continue to work around a stupid set of books. But just because an accountant thinks they can right mistakes, I don’t think it will be “very right”. To get it “very right”, you need a real computerized point-of-sales system.  

So, let’s restart the lesson: Your gross profit is the sales made today minus the cost of that object and the cost is located somewhere on the tag (at least it should be).

Inventory is never a cost. Inventory is an investment in your business. And it’s an investment that magically changes into a cost of goods on the day it sells — not the day you send a check to your vendor.

Here’s the wrong way, and we’ll show you why it’s wrong:

In January, I buy 10 Omega chains from ABC Chain Company. Cost $200 each, and we will sell them for $500 each. And let’s say it came in C.O.D. So that means in January, I paid $2,000 for chains (10 x $200 = $2,000).

So those of you who wrote the check as part of your “cost of goods” account would have in January a cost of goods of $2,000. (By the way, whether your account is called “purchases” or “cost of goods” is irrelevant. Many accountants setup a cost of goods account and call it “purchases”. Different name, same animal.)

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Now let’s say you have no sales during January, but on January 31, two people finally come in and each buys an Omega chain.

So what are your sales for January? They’re $1,000 (2 x $500 = $1,000).

And what is your cost of goods for January? It’s $2,000. That means that, according to your P&L, you lost $1,000.  

Is this correct? On your books, it looks correct. But it’s not, and here’s why:

The right way to do it would be to write a C.O.D. check in January for $2,000 for 10 Omega chains. This does not go into cost of goods (or “purchases”), but into an asset account called “inventory”.

[inset side=left]This is correct accounting. It does more than merely tell you your net profit.[/inset]

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That means, you have no cost of goods because it’s an inventory asset. As for the two chains that you sold at $500 each, you now move them out of inventory and into the cost of goods account. This move lowers inventory by $400 ($200 x 2 = $400), leaving your levels at $1,600. Cost of goods has increased to $400 on the P&L.

This way, three accounts are affected: “sales”, cost of goods, and inventory. In the first, you only affected two: sales and cost of goods.

So, if we sold two chains for $1,000 and our cost of those goods is $400, this leaves us with a gross profit of $600. Divide the $600 by the sales of $1,000 and you get your gross profit margin, which is 60 percent.

(One other note: your P&L’s should also have separate columns for all the other big expense categories — salaries, advertising expenses, rent, and the most overlooked category, shrinkage, which tells you how much people stole or destroyed in your store.)

This is correct accounting. It does more than merely tell you your net profit. Really, that figure is only useful to send to Uncle Sam at tax time. This system truly tells you how well you are doing — or how poorly you are doing. It gives you figures each month that you can act upon and adjust to improve your bottom line.

Neither does the old accounting method help you determine your turn; it’s always off and makes you look better than you really are.

Besides, the old method only shows your profit 12 months later, when you take inventory.  

Wouldn’t you rather know today that last month stunk and do something about it to reverse your financial fortune in the coming 30 days? Or, would you prefer to wait until 13 months later when the accountant shows up? What in the world can you do to stem the tide of bad business 13 months later? The answer is … not a whole heckuva lot.  

Hey folks, if you don’t have a real point-of-sale system and you don’t have the accounting setup right, you’ll probably always be robbing Peter to pay Paul.

There are some jewelers who can make a great living without a POS system, but these are people who are completely tuned into their inventory levels and are frugal by nature. And these are few. This is the kind of stuff I regularly tackle when I do store visits.

The big stores all do it the way I described, not the “old accounting way”. By forking over several grand for a new POS system, you can run your store like a big store. Shouldn’t you?

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 April 2004 edition of INSTORE[/span]

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David Geller

Here Are a Few Tips You Haven’t Seen to Make the Most of Your Bridal Custom Designs

They’re simple yet brilliant.

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IT’S 2019, AND it’s not your daddy’s jewelry store anymore. No more high margins on diamonds. Where’s the money now? The mounting.

Keystone is the goal, and many get it on the mounting, but comparison shopping can make it difficult. That said, the really big problem with selling from the showcase is the amount of inventory you must carry.

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On the other hand, custom designing an engagement ring has many advantages:

  • Higher profit margins
  • You pay for the item after you’ve collected money from the customer.
  • The customer feels like they are directing the process rather than being “sold.”
  • If you share the process of designing their ring with the customer, they will likely share with their friends and family. It’ll be on social media, texts and emails.
  • You can adjust which components go into the ring to more fit their budget.
  • Selling from the showcase has a closing ratio of 30 percent in most stores, but custom design has a closing ratio of 70-80 percent.

The downside? Someone must know how to design the ring, how it comes together and pricing. Training is essential, or having someone specific to sell the ring and lead the customer through the process. Figuring out how to price the item requires particular skills.

Here are some additional tips to make the most of your custom design process:

  • While designing the ring, if you use CAD/CAM, take a snapshot of the model on the screen and send it to the customer, saying something like, “Well, Jim has gotten started on your beautiful design.” If you hand-carve the wax or mill it, take a picture and send by text or email. Same goes for the casting process and another of the jeweler finishing up the ring.
  • When appropriate, send out a handwritten thank-you note.
  • Go to Office Depot and buy a pack of 100 sheets of do-it-yourself business cards. Make yourself a master blank company business card with no logo, just everything else about your store. Take a good picture of their new ring and paste it on the card, then print a sheet of 10 and have it in the envelope when you deliver the ring.

After they “ooh and aah” over the ring, tell them, “I’m glad you love it. You know, we have more customers come in from referrals than anything else and would love for you to refer family and friends. Here are some of our cards.”

Then plop them down on the showcase face up.

They will be so excited that they will not only place one on their refrigerator door, they’ll give them out to friends and show everyone how their ring is on “my jeweler’s business card.”

Isn’t this a fun business?

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David Geller

Close More Sales, Courtesy of David Geller’s Uncle Irv

These four “tricks” from an old sales pro will help you make more money in your store.

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MY UNCLE IRV WAS the No. 1 car salesperson for every single dealership he ever worked for. When he retired in 1987, he was the No. 1 Jaguar salesman in the United States. Here are some tips I learned from Uncle Irv that will help you make more sales today.

TRICK 1

My Uncle Irv had a Rolodex, and while the salesmen on the floor waited for a “hot one,” Uncle Irv was calling his previous customers to see if:

  • They had friends looking for a car.
  • Their lease was up and it was time to buy.
  • They were getting tired of the older model he sold them years ago.

He made appointments while the rest sat around and waited.

Tip from Uncle Irv: Call your customers twice a year to just say “hi.” Contact them or their spouse about milestone dates for gift ideas.

TRICK 2

Uncle Irv fought in the Philippines, and at age 26, he was considered an “old soldier.” He told me they were preparing to go to battle and a 19 year-old started to cry. The sergeant came to the private and asked, “What’s wrong?”

“I’m scared, Sarge. I don’t want to go.”

The sergeant replied, “You don’t have to go, son. You just can’t stay here!”

In the 80s, I almost went bankrupt. Uncle Irv told me this story and said, “David, you just can’t stay here where you are now.” So, I got up enough gumption, fired half of my 16 employees, started over, developed the price book, and a year later, started to make it back.

Tip from Uncle Irv: You can’t keep doing things the way you have been. Times are changing and you must change, too.

TRICK 3

When Uncle Irv was the sales manager of a big Chevy dealership here, he had to motivate and train the sales staff, but also give them confidence when times were tough. You’ve had the same feeling: it’s getting close to having to make payroll, funds are low and you’ll take any price to get money into the bank account. Uncle Irv didn’t want to have the salesmen look at a walk-in customer as their last meal ticket and give away the farm.

Out of his own pocket, he gave each salesman three $100 bills to carry around at all times. He wanted them to feel like they didn’t need the sale, so that they wouldn’t discount so much.

Tip from Uncle Irv: In one way or another, throw money and jewels at your sales staff. Make them feel and look richer, and they will sell better. I used to let my staff buy or custom-make any piece of jewelry at 10 percent above our cost and take it out of their paycheck over six payroll periods.

TRICK 4

Uncle Irv told me that many salespeople are afraid of silence. He said, “Tell the customer the price and then shut the hell up!”

Scenario: You tell the customer $1,495 for the ring, and then there’s silence. Twenty seconds go by and you’re thinking “OMG, they aren’t saying anything. They are going to bolt or go online. Maybe I should give them a discount; I need this sale.”

Meanwhile, the customer is thinking, “Hmm, let me see — rent is due Friday, car note next week, summer camp dues in three weeks. No — I’m OK, I can do this.”

The first person who breaks the silence will give up their money to the person on the other side of the showcase.

Uncle Irv also brought his lunch every day. He told me, “I can’t afford a $500 hamburger.” (You’ll get it.)

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David Geller

Here’s How To Calculate How Much Your Jewelry Salespeople Should Earn

But that also requires that you let them make sales.

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A JEWELER EMAILED ME this question: “I have always heard that a jewelry sales associate should sell 10 times what they make as a gross wage. Do you think it is still true today? What about associates with other responsibilities who aren’t always on the sales floor?”

Here’s your answer: 10 times sales as salary (or being paid 10 percent of what you sell) is “sort of correct.”

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The number is actually between 8 to 13 times their pay. If they sell 8 times (or cost you 8 percent of their sales), they are very efficient. If their cost is closer to 13 percent, they are inefficient.

So if a salesperson is paid $35,000 a year, they should sell between $270,000 to $437,000.

But here’s the question: How much do you personally sell out of total sales of the store? That includes product sales, appraisals, repair and custom.

If the store does $700,000 in sales and you only wait on diamond customers and your sales are $500,000, then that leaves a remaining $200,000 available for sales staff to sell. So the salesperson is physically unable to sell even the minimum of $270,000, much less the higher end.

Take your sales away from the total and see what’s left for staff to sell.

Don’t tell me what they could do to bring in more sales. That’s an excuse. Why? Because you have to be the sales trainer.

You’d have to train them to:

  • Increase their average dollar sale.
  • Try to add on to what is sold to each customer. Goal would be add on to 25 percent of their sales.
  • Keep a client book of some type, keeping track of birthdays and anniversaries and contacting customers to remind them to buy something for these events. This starts with sending thank-you cards after every single sale.

If you’re too busy to be a sales manager, then don’t complain that they don’t sell enough.

What about employees who have other duties? That makes it impossible to sell 10 times their pay if they are only on the floor 15 hours a week out of 40. They would be considered “fill in.” Just pay a salary or wage and be done with it.

But if you wanted to pay them some type of bonus or commission plan, you’d figure out what percent of the week they are on the floor. So in this example, if the employee is on the floor 15 hours out of 40, then 38 percent of his workweek is selling. If he makes $35,000 a year, 38 percent of it is equal to $13,000 of his pay to be on the floor selling. Divide $13,000 by 0.08 and 0.13, and his sales should be $100,000 to $162,000.

There are many ways to compensate for excellence in selling. When I was a store owner, I paid straight percent of sales. You can pay a percentage of the gross profit, which ensures that the more they discount, the lower the percent of profit you pay. There are spiffs: sell these things over here and I’ll give you a set amount of money. There is share: if we all reach a goal amount this month, I will give everyone an amount of money. Or you can give things: sell so much or a particular item, and I’ll give you tickets to a show/fancy dinner out/day off/spa day.

All salespeople come to work with their car radio set to WIIFM: “What’s In It For Me.”

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