On Running Your Shop: Old Inventory, Not Margins, Is the Real Problem
Know how much inventor y to have.
BY DAVID GELLER
Published in the June 2012 issue.
Better margins are always a good thing. But jewelers typically don’t have money problems because they don’t make good margins. The main thing I see causing money problems is too much old inventory.
If you buy a diamond for $1,000 and sell it for $1,500, fine. But if you can buy it for $800 and sell it for $1,500, even better, right?
Not if every time you sell a $1,500 diamond you buy two more. No matter if you bought the original $1,500 diamond for a buck, you still wouldn’t have enough money from the $1,500 to pay for two $800 diamonds as they cost $1,600.
The more margin/money you make, the better off you are, but you can still make money and go bankrupt.
So how much inventory should you have?
Look at your total sales of product for 2011. Exclude buying/selling gold and repairs and memo. Look at two numbers:
Gross profits from product sales and cost of goods for those sales — cost of goods for 2011 is not what you paid for stuff, it’s the cost of what you sold. Big difference! So let’s say you had $1 million in jewelry sales in 2011 and your profit margin was 48 percent. Therefore, your two numbers would be:
Gross Profit (48%) = $480,000 Cost of Goods = $520,000
The correct amount of inventory to have is either $480,000 or $520,000 or any number in between.
Inventory levels should really be no higher than your gross profit dollars. In this example, $480,000. If you had this level you’d have less debt and more money in the bank and fresher inventory.
Here’s a secret: Add up inventory over one year old in your store. Multiply it by 80 percent. Now look at your total debt:
Add it up and typically 80 percent of the value of aged inventory is equal to your store’s total debt. Get rid of aged inventory and:
1You’ll have the right amount.
2You’ll have much less debt.
3 You’ll have the ability to buy newer stuff and your store will have fresher merchandise.
So make good margins, but if you want to know how jewelry stores are doing well in this economy it is because of how well they handle inventory, meaning turn.
And yes, my fellow jewelers, diamonds over a year old are considered dated merchandise. Just because it’s a diamond doesn’t mean squat. If a $1,000 cost item would sell for $1,600 and it’s two years old, does it matter if it’s earrings, a jade ring or a diamond?
There’s nothing special about diamond money versus earring money. If it takes over a year to generate money, it’s a sad thing.