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Malcolm Alderton: The Holidays’ Biggest Danger

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MALCOLM ALDERTON of ARMS warns you about one thing that can make the holidays go very, very wrong.

It’s A Fact. Overbuying for Christmas is the single biggest cause of liquidity problems in the jewelry industry. And history has shown that the August to November buying pattens cause this problem. The answer to this problem is simple. Only buy a level of stock that you will sell. While it does take some number-crunching to determine this level, the biggest challenge actually facing most retailers is simply to change their own habits. This isn’t as easy as it sounds. Especially when those habits are supported by the hard sell of the jewelry trade shows, the alluring new ranges from suppliers, and all the white-hot hype that comes along with the lead-up to Christmas.

The basic principle requires approaching the task of buying armed with an “Open to Buy Fund” (OTB) budget based on “Cost of Sales”(COS), as opposed to buying according to the bank balance.

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Last year, I met a jeweler with annual sales of $2.55 million. His November-December holiday season sales account for a third of his annual sales. With budgeted sales in this two month period of $850,000 at a mark-up of 101 percent (say 100 percent for this article to make calculations easy to follow), his cost of sales were $425,000. This means he should have only spent $425,000 on stock and repair purchases for this period. He runs a stock level for the rest of the year of around $900,000 so his stock should have been back down to $900,000 by the end of December.  And it would have been if he had controlled his buying. But he didn’t buy with a plan. His cash flow was good so he bought purely on emotion. (Everything he purchased was so nice that he just knew he could sell it. Sound familiar?). He ended up purchasing $590,000 for the season.

When the dust cleared, his uncontrolled buying of $590,000 left him with unsold excess stock of $165,000 (the difference between OTB and actual buying). This would have to be paid for in the months after Christmas, when business was quiet.  Every dollar of surplus stock left after Christmas resulted in one less dollar available to meet other commitments. And like many other businesses, December is the only month of the year with sufficient profit and surplus cash flow to meet these commitments. If the cash is sitting on the shelf, it is not in the bank, and thus cannot be used for other things such as loan repayments, a new car etc.  To add insult to injury, he also had to pay interest on this $165,000. This jeweller had counted on the $165,000 to pay taxes and fund an extension to his home that the family had become quite excited about. That didn’t happen.

Did this jeweler misjudge his November December sales? No, he didn’t. He had good history to draw on and the sales ended up coming in close to budget. He had experienced a 6 percent increase for the first nine months and could reasonably expect a 6 percent increase for the rest of the year (and actually, he ended 6.1 percent up). He know his mark-up was 100 percent for the year-to-date (YTD). So with the following simple calculation he would have given himself a buying budget. (Which, if he had followed it, would have allowed him to build the extension on his home.)

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OPEN-TO-BUY FORMULA

1. Take sales of stock and repairs for the previous November December period. $802,000

2. Add anticipated 6% increase ($48,000) based on year-to-date performance $850,000

3. Divide by 2, as year-to date markup percentage was 100%. Cost of sales is, thus, $425,000.

4. This cost of sales becomes the OTB for the November-December trading period. $425,000

6. Subtract cost of Repairs ($34,000) which are 8 percent of his business. $391,000.

7. Subtract cost of special orders ($89,000), which are 21% of his business. This leaves an open-to-buy for new stock (and replacement of fast-selling stock) of $302,000.

Now let’s look at your business. You can start controlling buying right now by setting an OTB for Christmas, calculated as above. Write it down in a book. Then every time you place an order for holiday stock, deduct that amount, leaving a balance which is still available to buy. Don’t order more than your OTB, or you will  probably be left with surplus stock to fund. This OTB is in its simplest form and will need to take into account replacing fast stock. However, the principle remains the same … with only some refinement required.

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With every supplier at the jewelry trade shows presenting such new and exciting ranges, it is very tempting to load up on new products. And the fact is, it would an extremely boring world if suppliers and manufacturers didn’t present brand-new beautiful things every year. But remember, with a strictly controlled Open to Buy fund, you can still purchase fresh, exciting stock for Christmas. And, at the same time, you can also be confident that you won’t be burdening yourself with a major liquidity problem after the holidays.

Remember, you alone control your financial situation. So don’t buy according to your bank balance. And do buy according to your projected sales. If you don’t, those post-holiday liquidity problems will come back to haunt you.

Malcolm Alderton is president of Advanced Retail Management Systems (ARMS). He has been advising jewelers how to develop their businesses for the past two decades. Contact him at [email protected]

This story is from the September 2003 edition of INSTORE

David Squires is the Group Editorial Director of SmartWork Media. He believes that the first role of business media is to inspire readers.

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