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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 How To Calculate How Much Your Salespeople Should Earn

But that also requires that you let them make sales.

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A JEWELER EMAILED ME this question: “I have always heard that a jewelry sales associate should sell 10 times what they make as a gross wage. Do you think it is still true today? What about associates with other responsibilities who aren’t always on the sales floor?”

Here’s your answer: 10 times sales as salary (or being paid 10 percent of what you sell) is “sort of correct.”

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The number is actually between 8 to 13 times their pay. If they sell 8 times (or cost you 8 percent of their sales), they are very efficient. If their cost is closer to 13 percent, they are inefficient.

So if a salesperson is paid $35,000 a year, they should sell between $270,000 to $437,000.

But here’s the question: How much do you personally sell out of total sales of the store? That includes product sales, appraisals, repair and custom.

If the store does $700,000 in sales and you only wait on diamond customers and your sales are $500,000, then that leaves a remaining $200,000 available for sales staff to sell. So the salesperson is physically unable to sell even the minimum of $270,000, much less the higher end.

Take your sales away from the total and see what’s left for staff to sell.

Don’t tell me what they could do to bring in more sales. That’s an excuse. Why? Because you have to be the sales trainer.

You’d have to train them to:

  • Increase their average dollar sale.
  • Try to add on to what is sold to each customer. Goal would be add on to 25 percent of their sales.
  • Keep a client book of some type, keeping track of birthdays and anniversaries and contacting customers to remind them to buy something for these events. This starts with sending thank-you cards after every single sale.

If you’re too busy to be a sales manager, then don’t complain that they don’t sell enough.

What about employees who have other duties? That makes it impossible to sell 10 times their pay if they are only on the floor 15 hours a week out of 40. They would be considered “fill in.” Just pay a salary or wage and be done with it.

But if you wanted to pay them some type of bonus or commission plan, you’d figure out what percent of the week they are on the floor. So in this example, if the employee is on the floor 15 hours out of 40, then 38 percent of his workweek is selling. If he makes $35,000 a year, 38 percent of it is equal to $13,000 of his pay to be on the floor selling. Divide $13,000 by 0.08 and 0.13, and his sales should be $100,000 to $162,000.

There are many ways to compensate for excellence in selling. When I was a store owner, I paid straight percent of sales. You can pay a percentage of the gross profit, which ensures that the more they discount, the lower the percent of profit you pay. There are spiffs: sell these things over here and I’ll give you a set amount of money. There is share: if we all reach a goal amount this month, I will give everyone an amount of money. Or you can give things: sell so much or a particular item, and I’ll give you tickets to a show/fancy dinner out/day off/spa day.

All salespeople come to work with their car radio set to WIIFM: “What’s In It For Me.”

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David Geller

Why David Geller Says You Should Sell Lab-Grown Diamonds

You’re a merchant, so sell the customer what they want.

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ONE OF THE JEWELER pages on Facebook has been discussing whether a store should stock and sell lab-grown diamonds. The dad says no, while the millennial son says, “I think we should try it.” The reader vote is split about 50/50.

Can we talk about making a living here for a moment? And selling consumers what they want?

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Customers want to know their options and make their own decisions. Be their personal shopper.

I started in 1974 as a trade shop. I used to do work for a store at our mall, Wellington Jewels. I sized the gold rings they sold and set stones.

What stones? Strontium titanate. It’s a diamond simulant that has colors like an opal. Hardness on Mohs’ scale? About 5.5! But sparkle, oooh weeee!

The store was mostly black walls and showcases, with bright lights to make the stones pop. They made great money, and these are diamond look-alikes with the hardness of an opal. The mountings were 14K gold with real melee diamonds. They didn’t sell much fashion, which I told them was crazy, because a woman can only buy so many engagement rings.

I became friendly with the store manager and she agreed. So I ordered a dozen at a time in fashion mountings from a catalog, furnished the mountings and diamond melee, and she gave me center stones, which I set. They’d sell most of each dozen I gave them within five weeks.

So let’s talk profits on this product. All merchandise was quadruple markup.

They gave a lifetime warranty on these stones. If the stone scratched or chipped or fell out, they’d replace them for 50 percent of the price (so they still made keystone).

This was junk compared to lab-created diamonds. Remember: a lab-created diamond will last as long as the human does.

What about resale value? Well, they can’t get their money out of what they spent on your natural diamond, so try lab-created, make a better margin and keep that young person from buying it someplace else.

When you quote a price to a customer for anything, you may be thinking, “They aren’t talking. Maybe I should come down on the price. OMG I need to make payroll this Friday.”

They may be thinking: “Darn, my student loan note is due at the end of the month. Maybe I should opt for a lab-created diamond. I can’t tell the difference and we need to save for a house.”

Be their personal shopper, make a customer happy and make some money!

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David Geller

How Geller’s Blue Book Came Out of Abject Failure

David Geller’s failure in business led to success as a retailer and later as a consultant.

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WHEN I STARTED MY shop in 1974, there was no “Geller Book” for pricing repairs and custom. You relied upon your best guess, copying other people’s price lists or calling around to find an average amount to charge.

Although I didn’t know how much to charge, I quickly learned how much I would have to pay for salaries, rent, findings, advertising, etc.

By 1978 or so, my accountant just reconciled the books. He couldn’t help at all with my problem of making money. I had difficulty paying bills on time and paying myself a good wage.

By 1986, we had a thriving business doing repairs and custom. We had 16 employees, but still we were always behind the 8-ball. We did $830,000 in business, 75 percent from the shop, but we owed $250,000 in accounts payable, $65,000 to the IRS for payroll taxes and another $25,000 to the state for the same thing.

On Christmas Eve, I fired half of the employees, and during the following week after paying whomever I could, we still had the same amount of debt.

Don’t tell me about your bad day.

January 2nd, we opened up with half the number of employees and $125 in the checking account.

Don’t tell me how you had a bad month.

Summer of 1987, the IRS put a lien on both my home and the store and twice wiped out the balance of our business checking account to try to pay our payroll taxes. So, to ward off the inevitable, I paid an attorney $5,000 to help me declare bankruptcy.

Don’t tell me you had a bad year.

The next month, a diamond setter friend sent me his accountant. This guy had been an accountant, gave it up, became a watchmaker for 7 years, then went back to doing accounting.

This was the first accountant I had hired who knew how to make money with his hands.

First thing he did was work out a payment plan with the IRS and the state. So I didn’t have to follow through with the bankruptcy, but the attorney who had done nothing kept his $5,000 deposit.

Next thing the accountant did was teach me how to price labor. Pricing a lobster claw is easy. Labor is tricky, so he had me do something many of you would never do: I stopped paying the jewelers a guaranteed salary. I paid them 100 percent commission based on retail labor. That fixed my cost, and now I knew my labor cost to the penny and I could mark that up.

If the commission on any job was too low for the jewelers, then we raised the retail price so they would be paid correctly. This philosophy led me to write our first 250-page price book for our store in 1989.

By 1991, I put the sales staff on 100 percent commission as well. Both the jewelers and salespeople’s earnings increased, as did productivity and profits. We finally paid everyone off and became cash flow positive and profitable.

Years later, our top salesperson asked to buy the store, and meanwhile I was being prompted by the Scull consulting group to help other jewelers. So, I created Geller’s Blue Book to Jewelry Repair and Design and went to work helping my fellow jewelers be profitable in the shop. The store succeeds and thrives today.

Tough spot? You betcha. All of what transpired was scary and a huge change in business practice. But, the next step was liquidation by the IRS of my home and business, so what did I have to lose?

What would it take to get you to change your ways?

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