Connect with us

David Geller

David Geller: Costly Mistake

mm

Published

on

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

{loadposition davidgellerheader}

[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]

Advertisement

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.)

Advertisement

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]

Advertisement

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]

Advertisement

SPONSORED VIDEO

Wilkerson Testimonials

Having a Moving Sale? Let Wilkerson Do the Heavy Lifting

For Jim Woodard, owner of Woodard’s Diamonds & Design in Tullahoma, Tenn., when it was time for a moving sale, there was only one company to help with the event: Wilkerson. “They brought in the right team for us,” he says, remarking about the sale’s extraordinary results, including a nearly 500% monthly sales increase compared to the previous year. “I wanted to have the best in the industry. And that’s the main reason why I contacted Wilkerson.”

Promoted Headlines

David Geller

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

As one factor decreases, another must increase.

mm

Published

on

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.

Advertisement

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?

Advertisement

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!

Continue Reading

David Geller

What You Can Learn About Turn from Clothing and Furniture Stores

Hint: Turn more, earn more.

mm

Published

on

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.

Advertisement

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!

Continue Reading

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.

mm

Published

on

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.

Video: Things to Remember When Dealing with ‘Gonna Buy’ Jewelry Customers
Headlines

Video: Things to Remember When Dealing with ‘Gonna Buy’ Jewelry Customers

Video: Why Jewelers Should Get Creative With Their Offers and Not Always Think of Discounting
Jim Ackerman

Video: Why Jewelers Should Get Creative With Their Offers and Not Always Think of Discounting

Video: The Right Way to Make Add-On Jewelry Sales
Jimmy Degroot

Video: The Right Way to Make Add-On Jewelry Sales

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?

Continue Reading

Most Popular