David Geller: Profits of Doom

MARGIN’S NOT EVERYTHING. Yes, making a profit is important, but did you know that over 55% of companies declaring bankruptcy in the last five years had a profitable P&L? True.

You can go out of business making a profit. How? By spending more than you make!

The solution is not just about reducing costs (although you should always be on the lookout for ways to cut them). But what some people fail to realize is that rent, advertising and salaries are not your only expenditures.

That’s right, I’m talking about inventory. Specifically, the unsold kind — which is the number-one thing that kills jewelers.

Part of the problem is the way many store owners think about inventory. It’s not merely an expense or cost of goods. It’s an investment in your business. It’s an asset account.

If you buy a chain for $100 and sell it for $200, you’ve definitely made money. The $200 has got to be divided into two parts:

1. $100 goes to pay the vendor for the chain.
2. Another $100 goes to pay expenses and for that little bit shoved aside as net profit.

So, you’ve spent all your money and made a little profit.

But that’s not the whole story. The reality is, you bought five chains at $100 apiece, and therefore owe $500 to the vendor. So you sold one chain for $200. You’re still stuck owing $400 to the vendor for unsold inventory.

That’s why turn is so important for jewelers. Here’s a good rule of thumb: If you make keystone, you can keep it one year. If you make less than keystone, you must keep it less than one year.

Profit is important, but without strong turn, your store is a sinking ship. Therefore, you need a tool that takes into consideration:

• How much you made when you sold it
• How many times a year you sold it
• How much inventory you had on the day you sold it

This tool is called Gross Margin Return on Investment (GMROI). It answers the question “How much money did I make on my inventory, including the items I didn’t sell.”

You’re asking “How can I make money if it didn’t sell?” Well, think of your stock portfolio (if you have any left after the 2000 crash). You own five stocks. You boast at a dinner party, martini in hand: “My portfolio made 22% this year.”

That’s great, but did all five stocks make 22% or even make money? Might be that the profits from your portfolio look like this:

Two stocks stink but you still did well. Are you happy overall? (Probably yes). But would you have been happier if you hadn’t been holding “HIJ” and “KLM”? (Definitely). So go out and find replacements.

Your inventory works the same way. GMROI tells you how well a category did. In a store, you might start out with 50 colored-stone rings. During the year you sell 30. That means 20 didn’t sell. You should look at the whole 50 as a group. The goal is that the items sold should make you enough profit to:

A. Pay for the total invoice, including the price of those that didn’t sell.
B. Pay their share of expenses (overhead).

That’s the glory of GMROI.

I met a jeweler at one of my QuickBooks workshops who was whining because his watch department had a gross profit margin of only 23% due to the fierce competition. We looked at his GMROI and it was well over $3.23! (Industry average is less than $1.00). This meant for every dollar he had in inventory, he was earning $3.23. How? He did a huge amount of special order.

To raise watch GMROI, he lowered prices and ended up selling more than three times the units he stocked, lifting that department to the same level as the rest of the store. What might have happened if he waited to get keystone? He probably would have sold one quarter of the units he owned and his GMROI would have been about 25 to 50 cents rather than over three bucks.

In the stock market, it’s said that “Bulls make money and pigs get slaughtered.” What does this mean to you? When it comes to making money, waiting for the big kill will wipe you out. Sell more fast-turning items, and watch your profits climb.

This story is from the September 2006 edition of INSTORE.