“IF I MADE that much money, where the heck is it?”
After getting one’s tax return back from the CPA, this is the usual question. Jewelers often tell me they aren’t making any money when, in fact, most I help do make a profit in the store.
But making a profit and having money are two completely different things.
Let’s just talk jewelry sales. If you sell $500,000 and earn keystone, your gross profit is $250,000.
If expenses are $200,000, then your net profit is $50,000, which is 10 percent of sales. Awesome!
“But I have no money!”
Easy. Look at how much inventory you have. At keystone, the amount of inventory you should stock is about equal to your gross profit from selling jewelry. So, if your gross profit was $250,000, then $250,000 should be about inventory level. If inventory is $400,000, the extra $150,000 (which you’ve been overbuying for a few years) hits you in the behind.
Take that $150,000 “too much inventory” and divide by half to three-quarters (leaving either $75,000 or $110,000). Then go look at your QuickBooks or accounting program and add up your accounts payable, credit card debt, bank loans, and loans from owner.
And you’ll see excess inventory is equal to debt, give or take.
In the jewelry industry, a good inventory turn is 1.0 (one time per 12 months). For every month after 12 that stale item sits in the case, the selling price (at keystone) must be increased monthly by 4 percent to make the same amount of profit after a year. If an item cost $100 and sells for $200 and is a year old, then each month starting with month 13, you must add $8 to make up for the second year’s missing profit month-by-month. By month 18, you’d need to raise the price by $48. In two years, it would need to make you $200 instead of just $100. And just think: you could have invested that money into new inventory!
Note: If you have this kind of old inventory and have less debt, I’m betting you do a large amount of shop sales (which requires virtually no inventory) or buy/sell a lot of scrap. These are “free money” departments, requiring little inventory while throwing off good profits. But why work your tush off in one place to help pay for a debt-ridden department someplace else in the store?
Most jewelers think jewelry (including diamonds) doesn’t go out of style. Wrong. Jewelry goes out of money.