WE’RE GETTING THERE! In the previous article in our Quickbooks series, we entered our sales, cost of goods and inventory adjustment from our Point of Sale Program. (As an aside: if you do not have a Point of Sale program you can use QuickBooks as one. It’s a poor substitute, but certainly better than writing paper receipts by hand.)
Now I want to show you how to read the report.
First, on your profit-and-loss report, click on MODIFY REPORT. Above the “advanced” button, there’s a box to click “% of income”. Once done, you’ll get the columns looking like mine do. So let’s dive into the columns.
First off, we can see we’re making gross profits. Feel great? You shouldn’t yet! QuickBooks shows, at the bottom of our chart (Point #2) an overall gross profit of 43.7% for all sales. Your accountant probably does that, too. But the fact is, you might have one area of the store doing great, another poorly, and only the law of averages shows you’re doing “pretty good”. If you could find the poor ones and fix that, then you’d be doing great! Dividing the store into the income areas will help us do that.
But we’d rather look at the three individual boxes and do our own math.
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First, we can see that selling from the showcase is 54.9% of total sales. (Point #1). That’s a good thing but it also means nearly 45% of our sales do not come from the case. Special orders are about 24% and the shop does about 21% of sales.
Most of you would stop there. But notice that shop costs (not all are included in the graphic — this is a shorter version for print here) are located in one place. This is unlike your current P&L, which has jeweler’s wages way down in payroll and shop cost spread all over the place. Watch why that’s important.
Again, we need to analyze this further. Sadly, QuickBooks reports are not re-arrangeable, so we must do this by hand.
Let’s look at Showcase Sales. Somewhere on the P&L print out, I’d find a space to write by hand our Showcase Sales, then underneath our Showcase Cost of Goods and find our profit:
- Showcase Sales: $2,500
- Showcase COG: -$1,250.00
- Showcase Gross Profit: $1,250 (or 50%)
(To find percentage, divide gross profit by sales)
Then do the same for Special Orders:
- Special Order Sales: $1,100
- Special Order COG: -$850
- Special Order Profit: $250 (or 22.7%)
And finally, the Shop:
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- Shop Sales: $950
- Shop COG: -$462.00
- Shop Gross Profit: $488 (or 51.3%)
Remember our overall gross profit was 43.7%. Nothing to write home about. But look! Our gross profit from the showcase is 50%. Keystone. Good. Now look at Special Orders — they are 22.7%. We’ve identified the culprit — the big reason why our overall gross profit is low. So why would special orders be so low?
Most diamonds are specially ordered in for a customer. Now that we can see our profit margin is only 22.7%, we can start to address that portion of our business. Maybe if we could eke out five more points of profit we could get it up some.
The shop is doing fine at 51.3%. In terms of gross profit percentage, it rivals the showroom. (Someone must be using Geller’s Blue Book.) But think about the numbers here. We haven’t looked at the balance sheet where we would see inventory. But what if I told you this store kept $250,000 in inventory in the store? Think about this:
- The store has $2,500 in showcase sales, made 50% margin, but tied up $250,000 in inventory to make those sales.
- The store did $950 in shop sales (38% as much as showcase sales), with a 51.3% margin. But the inventory kept on hand for the shop was only $5,000 (in sizing stock, findings, etc.) Which area provides the best return on investment? Correct, you get a gold star!
Of course, we can’t ditch the showroom, but dollar for dollar, you know now that your shop is doing very well. Maybe you should consider expanding your repair and custom design services.
Two last things that I want to mention before wrapping up:
The overall numbers for the store can be improved by taking steps to improve performance in our Special Orders department. We know this now because of our division of three income departments.
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There’s far more research to look at, more than one column can perform. But once you have full year’s worth of data done this way, you will experience a vision … a vision of the most important number in your entire store:
GMROI (Gross Margin Return on Investment)
GMROI answers the most fiery of burning questions: “How much am I making off of my inventory?” It’s a simple formula, once you’re set up properly. All you’d have to do is find the gross profit for Showcase sales for one year back. Then you’d divide that by the average inventory level you had on hand for that year. Let’s assume this company still keeps $250,000 in inventory on hand. Let’s also assume our profit from the showcase for a year looks like this:
- Showcase sales for Jan-Dec 2004: $775,000.00
- Showcase Cost of Goods Jan-Dec 2004: -$387,500.00
- 2004 Showcase Gross Profit: $387,500 (0r 50%)
- Average Inventory: $250,000
- GMROI (Gross profit dollars divided by average inventory) $387,500/$250,000 = $1.55
This means for every dollar our store invested in inventory it brought in $1.55 in gross profits. The average jewelry store that is doing well is making $1.15. This shows we’re doing even better than we thought with only keystone.
But remember, we could make keystone overall and have a bad GMROI. For instance, if our profits were the same but inventory for the year shot up to $400,000, then our GMROI would drop to only 96 cents! Same profits, but lower GMROI. All because we’re stocking too much inventory.
In my seminars about point-of-sale programs and QuickBooks, this is what we try to hammer home. Most jewelers think gross profit is important. But, the truth is, gross profit sits quietly in the back seat while GMROI drives the car. And don’t you forget it!
Many of the point-of-sale programs have a GMROI report and that’s where you should run it. You should analyze GMROI by individual department in your store — rather than just calculating one overall figure for the year. That’s one of the main reasons why you should invest your money and time in a POS system.
Now, run and show your P&L to your CPA. She’ll probably faint! You’re so-o-o-o-o good!
This story is from the May 2005 edition of INSTORE.
