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David Geller

One Good Way (and One Great Way) to Lower Your Taxes and Raise Cash

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Lower your taxes

A couple of strategic moves can lower your taxable income and boost your cash flow.

During tax time, wouldn’t it be great to lower your taxes and get a boatload of cash as well?

You can and it’s all legal.

On your tax return, any inventory sold increases your cost of goods sold by the appropriate decrease in inventory. For example, if you sell a ring that costs you $200 and sells for $425:

  • Sales go up by $425
  • Inventory is lowered by $200 
  • Cost of goods sold also goes up by $200
  • Taxable profit = $225

But what if inventory went down by $350, cost of goods went up by $350 but income stayed the same?

The result is that your taxable profit on the ring is now only $75. That will make a big savings in taxes.

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Some jewelers and accountants devalue or lower inventory value on the books (inventory decreases and cost of goods sold increases, and voila, taxable income is lower). But if you only lower your taxes, you don’t get any cash.

If you have a $200 at-cost ring for three years, it’s tagged at $425, and you and your CPA lower the cost on your financials, it’s still at $200 in your inventory program. In addition, no one has bought this dog in three years; why wait for it to have a fourth birthday? Between you and your accountant, you have two options. One is just “OK” while the other is much better.

Option 1: “OK”

If you’re going to lower inventory to save taxes by, for example, $50,000 and keep the inventory in the case, you should do “tit for tat”. Go into your inventory program and lower the cost of a whole bunch of items by $50,000 in total and lower the selling prices as well! 

In this example, lower the $200 cost of the item to $100 and lower the selling price to $325. Your inventory dollars in the POS program will now match the balance sheet amount on the tax return, and you have just given that 3-year-old item another chance at being a star!

This will lower taxable income and help to sell the old item.

So far, we have legitimately lowered our taxable income and adjusted three things:

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  • Tax return shows lowered inventory and thus higher cost of goods/write-off.
  • Accounting program inventory is lowered as well to match.
  • A whole bunch of items in our POS program have also been lowered.

Option 2: Much Better

If you leave that 3-year-old item in the case at a lower price point, it might sell. But it is old and its chance of selling is still low.

The best thing to do is to remove it from inventory at its original cost. Forget taking a $100 write-off; write off the whole thing.

How does this work? Simple: by scrapping old inventory. But you must really scrap it! No “writing it off on the books”. 

Most POS programs have a button to “Scrap” an item. It will remove it from inventory (lowering inventory) in the POS program.

An integrated POS program will also lower inventory on the balance sheet in QuickBooks and send that $200 to a cost-of-goods or expense account. (You might have to do this manually.) Now you’ve increased cost of goods by $200 rather than $100. But now that you’ve “written it off,” take that ugly sucker out of the case and send it to a refiner or dealer and get whatever money you can for it! Get cash and save on your taxes. 

What will this accomplish for you? Lots:

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  • Lowers taxable income
  • Gets rid of inventory that customers have seen over and over again
  • Gives the store a fresh look
  • Raises sales staff morale
  • Brings in cash
  • Cash allows you to lower accounts payable and also allows you the room to stock fresher, more salable inventory, which will increase sales

If you scrapped a bunch of old stuff, would your cases look less crowded and prettier?

Your bank account would.


David Geller is a consultant to jewelers on store management. Email him at dgeller@bellsouth.net.

 

This article originally appeared in the April 2017 edition of INSTORE.

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David Geller

Here’s Why Coin Dealers Make More Profit Than Jewelers

It has a lot to do with a willingness to move quickly.

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WHO’S BETTER AT BUSINESS: a coin/bullion dealer or a jewelry store owner?

Odd question, right?

I recently had a conversation with a store owner whose operation did $3 million in total sales, which were divided into two income streams: $1.4 million in fine jewelry sales, and $1.6 million in coin and bullion sales.

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I asked this store owner a few questions, and his answers were intriguing.

“What’s your margin in jewelry sales?”

“About 45 percent.”

“What’s the margin selling bullion and coins?”

“Anywhere from 8 to 12 percent.”

“OMG, really? That low?”

“Yep, you buy it, turn it fast and make a quick 8 to 12 percent profit.”

“When it comes to coins and bullion, when do you consider them old?”

“Two weeks. At such low margins, we can’t hang onto them. If a Canadian Maple Leaf coin stays here for two weeks, we’ll melt the sucker!”

I did not ask what percent of inventory is scrapped versus sold. But let’s assume one-third is sold a tad above cost and the rest at break even, and see what kind of money we could make if that’s all we did.

Let’s average the profit to an even 10 percent. Calculating one-third of 52 weeks means we will make a 10 percent profit 17 times a year. So say we buy a one-ounce coin for $1,300 and make 10 percent profit ($130). $130 made 17 times a year means we make $2,210 in gross profit.

Jewelry has its own “numbers” like coins/bullion do, just different ways of counting. So, similar to the coin example, let’s start with a ring that costs $1,300. Let’s say that $1,300 ring after a year sells for $2,600 and we make a gross profit of $1,300.

The coin dealer is doing better by almost twice as much, even though he only made 10 percent per sale and the jeweler made 50 percent.

Most jewelers look at the gross margin only. “Yeah, I made keystone.” But they’re not considering the turn ratio. And what if it took more time — like, say, two years? When you wait that long, the bad stuff starts showing up as debt. Your accounts payable go way up, as does credit card debt.

A coin dealer is better in business because he is forced to liquidate quickly. They think in terms of money, whereas jewelers think in terms of “it’s gold and diamonds; it will be in good shape and salable long after I’m in the ground.”

Jewelry is old in 12 months. Coins are old in two weeks.

Jewelers just shove their old crap to the left side of the case and stuff more crap in the case. I had a jeweler friend to whom I explained this, and he said he had a buddy who owned a furniture store. The furniture store guy said he never had a problem with old inventory. He said, “Where in the hell am I going to put extra beds???”

Learn something from the coin/bullion dealer. The faster you turn the item, the better for your cash flow.

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David Geller

Why You Should Never Discount Your Shop Labor

It doesn’t have “turn”; it only has “time.”

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YOU CAN DISCOUNT merchandise, whether stock or special-ordered (like parts to custom make a ring) because merchandise has turn.

But discounting labor is different. Labor doesn’t have turn, it has time.

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If you discount inventory, you can still do well if you sell it many times a year. Labor, on the other hand, can’t be sold many times a minute or hour. If you charge $100 to do something in an hour, you have your income of $100 and whatever you or the jeweler is paid is the cost for that hour.

If you discount that $100 by 20 percent to $80, your profit margin percentage decreases and you can’t make it back unless you:

1. Do the same job 20 percent faster.

2. Reduce the jeweler’s pay by 20 percent.

Neither one is going to happen, and we both know it. Instead, make it a policy never to discount labor. Here’s how you do it.

When quoting a custom job, break the pricing down into two columns: “Material” and “Labor.” List the individual diamonds, gold casting grain, and gemstones under “Material” and add that up in the first column. Under the “Labor” column. list your CAD/custom fees, setting, and engraving heads and add them up.

Now you have a total of material and total of labor.

As I mentioned above, material has turn. Let’s say you get an order for a custom ring on the first day of the month and deliver it on the last day of the month. Do that every month, and these items you specially ordered have a turn of 12. With such fast turn, you can discount material. But you can’t work any faster, so don’t discount the labor.

Here is how to present the price if the customer is resistant. Let’s assume material is $1,500 and labor is $1,200 (total = $2,700). You’ll have three prices on the sheet easily visible:

Material $1,500.00 | Labor $1,200.00 | Total: $2,700.00

You give this to the client. If they resist, you may respond, “As you know, we can’t discount labor, but maybe I can give you a small discount on the diamonds and gold.”

Why “as you know?” Because everyone knows that the plumber, electrician, car mechanic and appliance repairman don’t discount their labor.

If you discounted the $2,700 by 20 percent, you’d lose $540. By discounting the material only by 20 percent, you give away $300 but make it up in turn, keeping $240 more in labor.

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David Geller

Why Taking Another Day Off Could Help More Than It Hurts

Cutting your work week to four days could ease your mind while maintaining your bottom line.

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IF YOU’RE LIKE ME, you’re a workaholic. Some just love their work; others have nothing else to do.

When I owned a store, I always worked six days. Even though the store was closed on Mondays, the shop was working on Monday. We did try a four-day work week in the beginning. The reason was selfish. When we started in 1974, we were open on Saturdays. With no kids, I had a hobby: remote control airplanes. Had to do home chores on Saturday so I could fly on Sundays.

At the time, I had six employees and we were open five days, but all employees worked four days a week, 10 hours a day (7 a.m.-6 p.m.). Admittedly, it was tough getting people to work on time at 7 a.m.

There was one less day of breaks and lunches. The jewelers were more productive and enjoyed having three days off. We rotated, and every other weekend, they would have three days off in a row (otherwise, they had two days off together and one day off in the middle). The schedule stayed that way until we moved to a larger shopping center and we went to five 8-hour days. Don’t remember why.

What about the owner working four days? You are the boss, aren’t you? When I started creating my price guide, I took a day off from the store weekly and worked at home. Still working, but uninterrupted. Got a lot done.

Why won’t most store owners shorten their work week?

I know because I was a culprit.

You might make most of the store sales and figure that if you’re not there, sales will drop. Or maybe you don’t trust your staff. Or maybe you wouldn’t know what to do with yourself.

Before selling my store, other jewelers asked me to go to their stores to help them, and I was also speaking at state associations. I was absent a lot. What I learned from being away from the store was this: given the opportunity, the staff would step up to the plate and do a great job. We had store meetings bi-monthly, so the staff was already trained. By letting them take over, they learn even more and are eager to earn your trust.

Although sometimes I didn’t like a decision they made, it all worked out. It gave me the freedom to “think” and do better.

Many of the most successful stores I have visited are owners who “let go” and don’t micro-manage everything. Trying taking off during the week on your slowest day and see what that does for you for 30 days. You’ll be amazed.

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