April 3, 2018 @ 10:20 AM
Letter to my CPA
“If I made that much money, where the heck is it?”
After getting the 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.
Making a profit and having money are two completely different things.
Let’s just talk jewelry sales. If you sell $500,000 and get keystone your gross profit is $250,000.
If expenses are $200,000 then your net profit is $50,000 which is 10% 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.
Gross profit above was $250,000 and $250k should be about inventory level. If inventory is $400,000 the extra $150,000 (which you’ve been over buying for a few years) hits you in the behind.
Take that $150,000 “too much inventory” and divide by half to three quarters:
Either $75,000 or $110,000
Then go look at your QuickBooks and or accounting program and add up your
• Accounts Payables
• Credit Card Debt
• Bank loans
• Loans from owner
And you’ll see excess inventory is give or take equal to debt.
In the jewelry industry a good turn is “1.0”. That means most all things should sell within 12 months of buying it. To make up for not selling after 12 months, for every month that stale item sits in the case the selling price (at keystone) must be increased monthly by 4% 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 $8.00 to make up for the “2nd year’s” missing profit month by month.
Bought January 2016. Starting with January 2017 the selling price must be:
Jan 2017 $204.00
Feb 2017 $208.00
March 2017 $212.00
And so on because this product is to make you a $100 profit in a single first year. In two years it would need to make you $200 and if you plan to sit on it the piece it must give you the same profit in year two as if it sold in December and we have a new one.
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 but throw 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? It’s just like being single and having money then you marry someone who makes good money but spends more than they make. One spouse helps to pay for the other spouse’s indulgence. This is the showroom sales.
Most jewelers think jewelry (including diamonds) doesn’t go out of style.
Wrong. Jewelry goes out of money.
Director of ongoing profits