Ron Samuelson of Facebook's comments on Margins and my response Jan 2012
Ron Samuelson of "Jewelers Facebook Network" puts out good emails about the jewelry industry. He also owns his own store "Samuelson's Diamonds" in Baltimore.
This week's Facebook blast was about buying diamonds to make more margins rather than getting in memo. Memo does cost you more as the financing is built into it the cost by the diamond dealers. Someone has to pay for the original loan. His article is about the many reasons to stock diamonds rather than calling for one. Ron asked me to comment on his blog, which you can see at:
http://www.rambleonron.com/2012/01/28/message-to-retailers-buy-diamonds-for-stock/
So here is my response, it may not be what you thought.
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Making better margins are always a good thing. But jewelers typically don't have money problems because they don't make good margins. "Typically". The real reason for having money problems is having too much old inventory.
If you buy a diamond for $1000 and sell it for $1500, fine. But if you can buy it for $800 and sell it for $1500, even better, right?
But not if every time you sell a $1500 diamond you buy TWO MORE. No matter if you bought the original $1500 diamond for a buck, you'd still wouldn't have enough money in the $1500 to pay for two $800 diamonds as they cost $1600.
The more margin/money you make the better off you are but you can make money and go bankrupt.
So how much inventory should you have?
Look at TOTAL sales (without memo's) of PROUCT for 2011. Exclude buying/selling gold and repairs and memo. Look at TWO numbers.
Gross profits from product sales and cost of goods for those sales (cost of goods for 2011 is NOT what you PAID for stuff, it's the cost of what you sold. BIG difference).
So lets say you sold $1,000,000 in jewelry sales and your profit margin was 48% in 2011. Therefore your two numbers would be: Gross Profit (48%) = $480,00
Cost of Goods = $520,000
The correct amount of inventory to have is either $480,000 or $520,000 or any number in-between.
Inventory levels should really be no higher than your gross profit dollars. In this example $480,000.
If you had this inventory level you'd have less debt and more money in the bank and fresher inventory.
Here's a secret. Add up inventory over 1 year old in your store. Multiply it by 80% (multiply by ".80"). Now look at your total debt
Accounts payables
Credit Card Debt
Lines of Credit
Bank Loans
Money owed to owners.
Add it up and typically 80% of the value of aged inventory is equal to your stores total debt.
Get rid of aged inventory and
1. You'll have the right amount as stated way above.
2. You'll have much less debt.
3. Because you have much less debt you'll have the ability to buy newer stuff and your store will have fresher merchandise.
Going back to the right amount of inventory from above:
Gross Profit (48%) = $480,000
Cost of Goods = $520,000
If you keep the Gross Profit number ($480,000) as I suggested you'll have a little lower inventory selection level and MORE money in the bank. If you keep the Cost of Goods number ($452,000) as I suggested you'll have a little higher inventory selection level and LESS money in the bank.
Your choice but both are good choices. This is how GMROI is figured (Gross Margin Return On Investment).
So make good margins, but if you want to know how many jewelry stores are doing well in this economy, the difference is how well they handle their inventory. If you do this you'll also increase your TURN, the amount of times products move in and out of your store each year.
So make your margin but don't lose sight of inventory levels. Managing money will outdo margins almost every time. But manage margins and inventory levels together, now you can be a Warren Buffet of your neighborhood!
And yes my fellow jewelers diamonds way over a year old is dated merchandise. Just because it’s a diamond doesn't mean squat. If a $1000 cost item would sell for $1600 and its 2 years old, does it matter if its earrings, a jade ring or a diamond? No as when it sells it only generates money. There's nothing special about diamond money versus earring money. If it takes over a year to generate money, it’s a sad thing.
David Geller - JewelerProfit | February 2nd, 2012
