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David Geller

David Geller: Gates’ Way

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Having too much inventory in like throwing away money. David Geller helps you figure out how much is too much.

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[h3]Gates’ Way[/h3]

[dropcap cap=T]his article should have been delivered to your door on December 31st, but I couldn’t find you. I think you were sleeping off Christmas or getting ready for New Year’s. But you’re never too late.[/dropcap]

Even though it’s February, you can still follow in the footsteps of a very wealthy man: Bill Gates. “Billy” (his special friends can call him Billy) knows where every dollar sits and how much inventory is sitting in the warehouse. Like his good buddy Michael Dell, he doesn’t overstock, and both look at their numbers closely all of the time. In Billy’s case, he’s got so much money that an extra truck load of inventory won’t hurt him. You, on the other hand, ain’t no Bill Gates.

There are two areas where jewelry stores have money problems:

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[dropcap cap=A.] Not charging enough for their labor. This is an easy fix. Just raise your repair and custom prices! You can fix this problem in one day. I’ll be covering this topic more in next month’s issue.[/dropcap]

[dropcap cap=B.] Paying for inventory that does not sell. This is the same as having too much inventory. I didn’t want to mention it at first because you think you need all of it. But your customers obviously disagree with you.[/dropcap]

Let me explain before going further. Let’s say, for example, that you have $300,000 in inventory. Let’s also assume that you sold from the showcase (not including special orders or memo) $200,000. Basically, the amount of inventory you need is the amount you’d sell in one year. That’s a turn of “1.” This store has $100,000 too much inventory, proven by the fact that this is all you sold in one year.

Let’s say your store is located in a town which has a population of 60,000 people. So get this: Out of 60,000 people to whom you could possibly sell an item, you sold, out of those 60,000 people, $200,000 worth of jewelry (at your cost). If you have $300,000 in inventory, that means you actually have enough jewelry to sell 90,000 people!

So you need to either get an additional 30,000 people to move to your town or … or, you can bring your inventory level down to an appropriate level for the size of your town.

[inset side=right]And when counting sales, keep track of the items that you paid for separately from the other goods you didn’t[/inset]Obviously, there’s only one feasible answer here. So keep those inventory levels down. And when counting sales, keep track of the items that you paid for separately from the other goods you didn’t. Special-orders and memo sales are those that you do not have any of your money tied up in this group. If a memoed item doesn’t sell, it doesn’t affect how much money you owe. But you paid for your showcase merchandise and it must leave the store.

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(By the way, special-order sales are not custom designs. It refers to, for example, when you order a wedding band that you do have in a size that you don’t have at a customer’s request.)

Your point-of-sale program and thus your accounting program should be broken down into three major components. If or your accountant will do this you’ll be able to:

[dropcap cap=A.]Find out which departments are profitable and pulling their own weight.[/dropcap]

[dropcap cap=B.] You won’t allow one department to bring up a bad one. E.g.: Mixing shop sales with product sales (in a single category called plain old Sales) won’t allow you to find out the shop has a 28 percent gross profit margin while product has a 56 percent gross profit margin.[/dropcap]

Sure, if your profit-and-loss statement shows you at 51 percent, you feel happy. But if you knew your shop was operating at only a 28 percent profit, wouldn’t you feel mad? Why is the shop’s margin dragging so far behind my product margin?

[dropcap cap=C.] Find out the cost of goods for showcase sales. Why? So you can find out how much “too much” you have in inventory and what your turn is now.[/dropcap]

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To find your turn, divide your total year’s cost of goods by your average or ending inventory and you’ll get a number. “1.0” or higher is what you’re shooting for. Less than “1.0” and you’ll probably notice that you’re having a harder time paying your accounts payable.

There are three major income categories for a jewelry store and a matching cost of goods category for each. Calculate the figures for:

1. Showcase sales versus Showcase product cost of goods
2. Special Order/Memo/Consignment sales versus Special Order/Memo Consignment cost of goods.
3. Shop sales (includes repair and custom design) versus Shop Sales cost of goods (which includes jeweler’s wages, jeweler’s matching taxes and benefits, findings and mélée used in repair, gold sizing stock, tools, gas and oxygen.)

By doing it this way you’ll find the gross profit of each department. Look at percentages. You can do it on paper now. The shop’s gross profit percentage should be no lower than your gross profit on product. In fact it should probably be five to ten percentage points higher than product because of mistakes.

Now that you have your cost of goods line for showcase sales, divide that by average inventory for the year (or ending if you don’t have average. Average is found by adding inventory on January 1st to inventory level on December 31st and dividing that number by two.)

Think you need all this inventory so your customer has a proper selection? Well, sorry folks, you’re wrong. First, re-read my earlier paragraphs about population. Second, would you like to know how much inventory you need to have a really great selection? Yes?

Okay, here’s how much inventory you’ll really need in order to make sure that no customer ever has a reason to walk out of your store:

$100 million!

Now that’s a very nice selection. But who’s going to pay the bill for it?

If Billy Gates had a jewelry store I promise you he’d have less than six months worth of inventory on hand. That’s half of your year’s cost of goods. Good going, Billy! Why not follow his example?

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 February 2003 edition of INSTORE[/span]

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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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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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