Connect with us

David Geller

David Geller: Seeing Green

mm

Published

on

The right pay structure makes your sales manager a partner in your business without signing over your shares, says David Geller.

{loadposition davidgellerheader}

[h3]Seeing Green[/h3]

[dropcap cap=T]here are two very important job descriptions in a jewelry store:
Sales Associate: “To turn shoppers into buyers.”
Sales Manager: “To boost sales associates’ closing ratio and average sale.”[/dropcap]

Think about it. If your sales staff went from closing three out of 10 customers to four, that would be an increase in sales of 33 percent. If they increased the average sale from $300 to $400, that would translate to a 33 percent rise in revenues.  

Add those two factors together (increasing closing ratio by 1 more person per ten, and increasing the average total of each sale by 33 percent) and you get a whopping dollar increase. If your average sale is $300, and you sell three out of 10 people your sales would be $900.

Advertisement

But if you sold four out of 10 people a $400 item your sales go up to $1,600 — a 78 percent spike that would have you laughing all the way to the bank. (And remember, that’s all while seeing the same number of potential customers.) Does this help you see the difference an effective sales manger can make?

[inset side=right]A sales manager should be paid upon the performance of the selling team. And by performance, we mean profits, not just increased sales.[/inset]

A sales manager should be paid upon the performance of the selling team. And by performance, we mean profits, not just increased sales. After all, anybody can offer huge discounts to sell to everyone … and send you on the road to bankruptcy.

So pay your store manager based on the gross profits of the store. The higher the gross profit margin, the more of the gross profit dollars the sale manager will receive. You could easily add in a formula that provides a larger bonus if sales increased in addition to profits. (One key thing to remember: we pay off of gross profits, which is sales minus cost of goods. We don’t pay off of the net profit; as sales managers don’t generally have control over all of a store’s expenses.)

The first step is to decide what percentage of sales you will pay your store manager. A typical store manager might be paid three percent of total store sales. As many of you do when paying sales staff, you break this up into a salary plus a commission. And again, that commission should be based on gross profits. After all, those gross profits are what you use to pay your bills.

To build your commission-pay package, set a target. For instance, a $2,500,000 store giving 3 percent of sales to the sales manger would pay $75,000 per year. This is the target income of your plan. Now, build a structure that assumes the gross profit margin you desire is met. I am using 44 percent. So we’d pay a base pay or salary of $45,000. The other $30,000 would have to come from a commission or incentive plan. The manager could make more than the $75,000 … and yes, they could make less.

Advertisement

On the next page is a chart calculating potential scenarios, assuming $2,500,000 in sales.

So you’re done, right? After all, what else is there but making money? There’s lots more. I’ve seen plenty stores who make a 50 percent gross profit margin and still can’t pay their bills in January. Why? Because they have too much inventory and not enough “turn”. Turn is a subject I’ve written about before and we won’t get into it here. Simply, turn is found by taking the cost of goods for items sold from the showcase and dividing it by your inventory level. This will give you a number like “1.0” or “0.62”.  

You want a number greater than “1.0”, which means you sell your entire inventory at least once a year. If you have a number like “0.62”, that means it take you on the average 19 months to sell your entire inventory from the case. (The vendor gives you six months dating, and your customer buys it in 19 months. Makes it hard to make money, wouldn’t you say?) So increasing your turn will not directly make you more gross profits. That comes from sales. But it will improve your cash balance … since the stuff is not selling anyway. Increasing turn brings more dollars to your gross profit bucket and can reduce the amount of bills you’ll have to pay later. Just think what having another $100,000 grand in the checking account after paying your bills next year would mean.

[inset side=left]You could go further with this, adding in a compensation plan to give bonus for sales increases.[/inset]

So, encourage your store manager to increase turn by adding points to the “bonus percentage paid” if they achieve the goals you set. Here’s an example: for every .10 increase in turn (e.g. going from .70 to .80 turn), you add half of a point to the bonus percentage paid. Thus, in the case of a gross profit margin of 50 percent, the original bonus would have been 5 percent gross profit and, if the sales manager achieves their “turn goal”, should be bumped up to 5.5 percent. The final bonus would then be $68,750 — $6,250 more than the original $62,500.

You could go further with this, adding in a compensation plan to give bonus for sales increases. After all, we all do want sales increases — as long as they’re sales increases that result in increases in our gross profit. So, if you set a sales goal of $200,000 per month, you could offer a .5 percent increase in the bonus percentage paid for each 10 percent by which you exceed your sales goal. (And if you want to penalize the sales manager for failure to reach sales goals, you could similarly subtract .5 percent from the bonus total for every 10 percent that you fall below your sales goals.)  

Advertisement

Run the numbers for your business and see what a compensation plan like this could do for you. Then, make your sales manager a partner … without signing over your shares.

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 March 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

Here’s What’s Really Keeping You From Having More Money

If you think it’s low margins, you’re wrong.

mm

Published

on

I WAS READING THE Big Survey in last month’s issue of INSTORE, and one question popped out at me: “What will be your greatest priority next year?”

Thirty one percent of respondents said, “Boosting profitability.” The money-savvy ones (21 percent) said, “Clearing old inventory.” Most jewelers just don’t get that there is a big difference between making money and having money.

Video: How to Achieve a $100,000 Day in Your Jewelry Store
Headlines

Video: How to Achieve a $100,000 Day in Your Jewelry Store

Video: Increase Your Jewelry Sales Through Add-Ons
Jimmy Degroot

Video: Increase Your Jewelry Sales Through Add-Ons

Video: It’s Not My Problem When You Buy a $120 Ring and Your Wife Finds Out It’s ‘Fake’
Headlines

Video: It’s Not My Problem When You Buy a $120 Ring and Your Wife Finds Out It’s ‘Fake’

Someone once taught you that margin was your most important metric. Yep, that was a good thing when everyone made two and three times key, but no more. What hampers you from having money is not low margins as much as inventory level.

Your debt typically equals one-half to three-quarters of your inventory that’s more than a year old. It shows up as accounts payable, credit card debt, lines of credit, and money owed to you (the owner) for money you’ve personally loaned the company.

Having money depends on your ability to keep that debt to a minimum. How can you do that? As a jewelry store/shop owner, there are a few options.

  1. Repairs. This is a revenue stream that requires very few resources to produce income. Your ongoing costs are findings, small stones and your jeweler’s paycheck (plus the occasional equipment upgrade).
  2. Buying scrap. This really only requires several thousand dollars of cash on hand to make a profit. Buy it on Monday, mail it on Wednesday, get a check on Saturday and you’ve made a profit and replenished your cash to do it again.
  3. Inventory sales. This is likely your biggest cash outlay, and it needs to throw off revenue monthly. All of it must throw off revenue at least once a year. All of it. You can’t wait two and three years to have money come in to pay a bill or check tomorrow.

Look at 1 and 2 above. The amount of money required is small. You don’t keep scrap very long and most people order “just enough” in findings for jobs this month, maybe a few extra items.

But inventory piles up for years and causes debt. In a jewelry store, your average inventory level should be somewhere between your cost of goods sold and gross profit amounts for a 12-month period. Any amount above that will show up as debt and poor cash flow.

Keeping inventory within these two numbers (give or take) will increase positive happy cash flow, increase your checking account balance, lower total overall debt, remove stale and outdated inventory, and may actually increase sales as you have more leverage to buy new fashionable jewelry that pleases your customers.

That would be a good thing, right?

Continue Reading

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

Most Popular