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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

This Small Yet Logical Fee Can Add Big Profits to Your Bottom Line

This small yet logical charge can add big profits to your bottom line.

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I’M GOING TO GIVE you a tip that will make you $29,400 right here and right now. Here’s how:

Let’s say you take in 4,000 jobs a year. Of the 4,000 jobs, 75 percent of them (or 3,000 jobs) have five or more stones in them.

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Gene the Jeweler’s Rule: Never Buy the Same Piece Twice
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In your shop, you check and tighten up to four stones on any job, no charge. But if a piece contains five to 20 stones, you charge an extra $28 to check, tighten, and retighten if they get loose within 12 months (or replace melee if they fall out within the next 12 months). If there are 21 to 35 stones, you charge an extra $35.

This is worth it to both you and your customer.

I don’t care if the stones come in loose or tight, you charge the fee because you are on the hook. Whether they come in tight or not, you keep the $28. Therefore, your sales staff doesn’t have to check stones on take in; the jeweler does it at the bench.

When told this, 30 percent of customers will say, “No way, José.” So you write on the job envelope, “No guarantee; customer didn’t want to have stones checked and tightened.” You’re off the hook.

With that said, 70 percent of the 3,000 jobs with five or more stones will gladly pay the $28. That means you get to charge 2,100 customers an extra $28. That’s a staggering $58,800 you’d take in just because you asked!

Don’t complain how much it costs to replace a stone anymore. Don’t tell the client it’s her fault. You checked and tightened, and therefore you took in $58,800. Can’t you afford to make it right, even if it’s not your fault?

But maybe you’re still scared to do this. Let’s say just half of those clients said, “Yes, I want the guarantee.” Half of $58,800 is $29,400.

Do you know that is money that goes right to the bottom line, net profit on your P&L? Know what it takes to get an extra $29,400 in net profit? If your net profit is 5 percent of sales, you’ll need to do an extra $588,000 in sales to have that net profit.

In other words, just adding the $28 fee produces the same result as opening another store that does half a million dollars per year.

You’re welcome.

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David Geller

If Your Sales Are Acceptable But You Have No Cash, Look At Your Inventory

It’s an extremely simple formula.

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“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.

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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.

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David Geller

Here Are the New Inventory Rules of Jewelry Retailing

In today’s business climate, doing things the old way will kill your store.

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Did you previously work for your parents or a long-time jeweler? Because it’s not your grandfather’s Buick anymore!

When your parents or your old boss were younger, they enjoyed the luxury of “blowing money to the wind” on excessive inventory. Then they taught you how to manage a business, but now your livelihood is not as good as theirs was.

Back in the day, your parents or boss didn’t have to compete with Internet pricing and maybe didn’t have to worry about a “Rap list.” 

Back in the day, a store’s gross profit was 55-70 percent! Yes, stores got keystone on diamonds and four-time markup on color and gold. In the 1970s, I worked at Neiman Marcus as their jeweler, and I remember them selling a $100,000 diamond at triple key. Your parents or old boss may have told you, “Keep old inventory; it’ll sell.” And they may have said, “No one will pay higher prices for repairs; it will only hurt diamond sales.”

Not only are these things not true, but in today’s business climate, they will kill your store. Overall store gross profit margin percentage today is about 43-48 percent, and margins on diamonds continue to shrink. 

With that in mind, you can’t keep inventory for more than 12 months. Stock balance with vendors anything not selling within a year, or clear it out yourself. Additionally, you must increase your turn to compensate for low margins. Reorder anything sold within six months of stocking it. 

Lower gross profit margins on products means every department has to stand alone as an income and profit source. That means the shop is no longer a giveaway department; it must make its own money and it should be a 50 percent gross profit margin department.

Back in the day, high markups saved the day and you could be fat and lazy. Today, you have to be a lean, mean fighting machine. Your overall stock inventory amount at these lower margins needs to be about equal to a year’s gross profit dollars from selling this stock.

Be lean and mean and have more money and lower debt.

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