The Secrets to Sound Financial Management

Improving your financial efficiency ultimately allows you to manage your store instead of allowing the store to manage you.

Some retailers manage to survive by implementing short-term tactics in response to immediate financial concerns. More successful retailers thrive thanks to a detailed financial strategy that’s part of their long-term plan. That strategy guides their day-to-day decision-making.

A basic understanding of financial analysis is critical so that you can then act on that information. At the heart of effective financial management is the ability to understand how the key elements of your business affect its overall financial condition and to keep those elements in line.

There are three basic building blocks of a well-integrated financial management strategy: budgeting, expense control, and records and reports.

Budgeting. The budgeting process allows you to take a critical look at all areas of your business, anticipate cash flow needs, and measure performance. It’s an elementary practice in any well-run business. Yet many jewelers don’t budget. The most common reason is lack of time. If that’s true in your case, you can save time and effort by using budgeting software. But even if you don’t have such software, there are certain key steps to effective budgeting.

Start by listing line items for each income category. Your primary income categories are jewelry sales and repairs. But you may also receive revenue from accounts receivable interest, safe deposit box rental, or other professional services.

Next, provide a line for each expense category. Once you have your format, fill in the line item numbers based on last year’s performance. Then calculate each expense item as a percentage of sales. For example, if your sales were $500,000, and you spent $20,000 on advertising, that category amounted to 4% of sales.

Begin planning next year’s budget by plugging in estimated sales for the year. Then add other sources of income. Based on history, assign an appropriate portion of annual income to each month. Be realistic in your expectations, weighing the local and national economy as well as the strength of your staff and your merchandising. A budget can reflect aggressive goals but should be realistic.

Once you have your sales projection, apply the prior year’s expense percentages and convert them to dollars to arrive at a preliminary budget. Finally, review each line item carefully. Adjust for unusual prior-year circumstances, needed improvements, and other strategic changes. Let’s say your advertising budget last year was 4% of sales. But now you realize that to increase sales to your desired level, you should add another 2% to advertising for the coming year. Detail the areas that can benefit the most from budget scrutiny and review your performance regularly. Look carefully at standards for:

  • Gross profit margin.

  • Advertising.

  • Salaries and wages.

  • Inventory.

  • Capital expenditures.

  • Operating supplies.

  • Interest expense, especially on inventory loans and lines of credit.

Expense control. Retailers of all types in the last decade have witnessed steadily declining margins. To attain a worthwhile level of profitability and return on investment, today’s jeweler must control every expense, always looking for ways to cut costs. Examine each of these areas:

  • Lease. How well have you negotiated your lease and occupancy costs? Most markets today have substantial excess retail space, so even small retailers have leverage with landlords. If your occupancy costs are out of line with your sales and profit potential, look for an opportunity to renegotiate. Consider all the factors in your lease: base rent, percentage rent, length of commitment, operation hours, real estate taxes, and common fees (see “Getting the Best Lease,” JCK, February 1999, p. 116).

  • Utility costs. Are you in control of your utility costs? Sometimes it pays to challenge your charges. Have you set employee guidelines for the use of phones, lights, and other utilities?

  • Advertising. Are you getting the most from your advertising? Have you found the medium that brings the greatest return on your investment? Measure effectiveness with techniques like coded post cards, “bounce-back” offers, or customer surveys, and adjust your strategy accordingly.

  • Service providers. Are you diligent in bidding for service providers? You may be paying too much for services. Demand that all service vendors—insurance, maintenance, janitorial, accounting—submit bids. Scrutinize invoices for professional services such as legal advice and accounting, and ask for explanations for items that seem out of line.

  • Loss prevention. Implement strategies to minimize loss. Do you have clearly defined security standards regarding case keys, case counts, and general protection of merchandise?

  • Payroll. After inventory, labor is usually a retailer’s next largest operating cost. How efficient is your employee scheduling? Make sure your full-time employees have clear tasks and responsibilities and timelines for completion. Employees should be responsible for creating business, not just handling the people who come in. Is “downtime” spent productively by cultivating clients over the phone or by mail?

  • Health care costs. With the cost of employee health care benefits climbing rapidly again, jewelers should carefully monitor their benefit plans. Have you done what you can to control health care costs? Reevaluate your choice of insurance provider annually and shop around for better rates. Consider increasing deductibles or employee co-pays.

  • Inventory. It accounts for the biggest expense in jewelry retailing. How well are you managing inventory costs? Vendors reward you for timely payment and consistent reordering. Do you negotiate costs and terms on all stock purchases? (See “The Turn of the Shrewd: Insight on Inventory,” p. 182.)

Records and reporting. Obviously, it’s difficult to monitor expenses and inventory without some kind of system to provide timely and accurate information. Today’s successful jeweler must economize time and boost efficiency, both of which can be accomplished with the help of a good information system. It’s easier and less expensive than ever to equip your store with a system custom-suited to your needs. The biggest problem for most retailers is that, with so many choices, selecting one can be time-consuming.

The most immediate need of most small stores is to automate their accounting system. A basic accounting package should have at least three components: general ledger, accounts payable, and accounts receivable. You may wish to add a payroll component, which is usually a worthwhile investment given the time it saves.

Larger stores should link their accounting system to a good inventory-control system to reduce entry and reconciliation time. Connecting the system to a database management system provides even greater efficiency and better customer service. As a rule of thumb, don’t be afraid to commit 4% to 5% of your budget in a given year as a one-time cost to automate your store. (Stores with a volume greater than $1 million can apply a smaller percentage.)

Follow these guidelines in implementing an information system:

  • Research the availability and costs of hardware, software, and support services. Get recommendations from other retailers and trade sources. Choose the system and company that best serve your needs.

  • Involve employees in every step of the process. This will reduce training time and improve the efficiency of the system from the beginning.

  • Develop a timeline for implementation that’s acceptable to both you and the system supplier. If it’s too late to do it this fiscal year, plan for it in next year’s budget. But stick to your commitment to get it done.

  • Learn about your system’s reporting capabilities as far in advance of implementation as possible. This will help you identify your needs and build specifically structured reports into your installation service.

Once you have an information system in place, begin taking advantage of its internal reporting capabilities immediately. Generate internal reports regularly so you can measure performance, identify ways to improve, and take corrective action. Most small jewelers use only daily sales calculations to measure progress. But looking at other key areas will improve profitability. These include monthly operating expenses, gross margins, weekly payroll, sales by associate (daily, weekly, monthly, and annually), receivables aging, and net profit.

Several useful tools can help you measure your performance against common industry standards in any of these areas. One is Jewelers of America’s annual “Cost of Doing Business Survey.” It not only gives benchmarks for inventory productivity but also provides figures for occupancy, payroll, and other expense item comparisons. It’s available to JA members for $75; nonmembers pay $125. Call (212) 768-8777. Your accountant can also assist you in obtaining data from Robert Morris Associates, which collects information on various business sectors, including jewelry. Although less specific than the JA survey, the Robert Morris data can provide valuable insight. For information, call (800) 677-7621.

Besides helping to manage inventory, internal reporting can guide business development in other important ways. You can use it to:

  • Set daily sales goals and track progress from day to day. There should be goals for each salesperson and for the team as a whole. Associates should be constantly aware of performance goals and their progress toward achieving them.

  • Evaluate merchandise returns. Check the level of returns weekly and monthly, and review each transaction individually. This will lend valuable insight into customer preferences, merchandise quality, pricing issues, and the selling skills of your staff.

  • Monitor your gross margins. This will alert you to inappropriate discounting in daily sales, a need to reevaluate your merchandise mix, or changes in profitability based on supply and demand or other market conditions.

  • Monitor accounts receivable aging. This will help you manage collections and increase cash flow.

  • Create and maintain an open-to-buy system. With a solid budget in place, an OTB system allows you to plan purchases according to cash flow. That will bring more productive inventory and better margins thanks to favorable purchasing terms.

  • Monitor your monthly expenses by line item. Measure actual expenditures against budget and investigate discrepancies. Know where your money is going, then institute cost-control efforts to improve your bottom line.

Analysis and action planning. Information about the key performance indicators in your business is good to have. But it’s worthless if you fail to act on it. Only you can decide how much time to commit to studying and responding to information and reports. It may seem as if there’s never enough time to get through all you need to do as it is. Still, your efforts in budgeting, creating and maintaining a reporting system, analyzing details, and planning amount to a significant investment in your growth and long-term success.

Be careful, though, not to bury yourself in information. Determine which reports will give you the most useful data. Compare the data with established budgets, inventory benchmarks, and your goals. Be cautiously reactive and adjust your operation to maximize profitability. Share appropriate information with your staff so they can be part of the process. In fact, you should empower them to act on the information.

One of the most important reports for any retailer is the monthly income statement. It reports your actual performance against each budget line item for the month and the year to date. Careful analysis and responsive action planning can help you capitalize on positive factors and ensure that damage from errors or unexpected expense allocations are minimized. Every line item on a monthly income statement can provide useful information.

After reviewing income and gross profit information, analyze each expense category. Cutting expenses delivers profit directly to the bottom line. Build a plan of action as you review your statement. Identify problem areas and opportunities for improvement. Determine the action needed to bring about a positive change, decide who’s responsible for implementing it, and set a deadline for achieving a demonstrated result.

Effective financial management hinges on timely and accurate information. A new or upgraded computer system may require an outlay of cash but may save time in streamlining processes such as accounts receivable, inventory management, and employee scheduling. If you don’t have a system in place, is it cost-effective for you to get one? If you already have a computer system, are you using it to the fullest advantage? Taking action to improve the financial efficiency of your business ultimately will allow you to manage your store instead of allowing your store to manage you.

The Turn of the Shrewd: Insight on Inventory

Inventory management is a critical element of any well-run retail operation. Dead inventory can cripple your business. Drastic discounts to get rid of it will undermine your profitability. Here are some guidelines for rational inventory management.

Establish categories. The first step is to divide your inventory into categories such as diamonds, colored gems, gold and platinum, watches, non-precious metals, and giftware. Each category can have as many subcategories as you like. Table 1 lists some examples.

Once you’ve defined your categories, generate reports to help you measure your inventory productivity. Start simply. Create reports that provide clear information in three key areas:

  • Inventory levels.

  • Inventory aging.

  • Inventory turnover.

Inventory levels. Do you have enough inventory in the categories you sell most? Do you have too much inventory in other, slow-moving areas? Accurate reports will provide the information you need for a thorough analysis. Look at your inventory critically, from the customer’s standpoint. Do you have what sells, or do you have what you happen to like?

Compare inventory reports with sales reports, then look for ways to balance your inventory accordingly. Reduce levels of less-saleable categories while creating available dollars to boost levels of highly saleable goods. Rearrange displays to feature categories in which you’re overstocked. Often, simply putting merchandise in a different case with different props and signage can generate interest from both sales associates and customers. Find creative ways to display less “interesting” items alongside your better-selling categories. For example, arrange a selection of loose colored gemstones in the case with your fastest-selling gemstone rings.

Inventory aging. What’s the average length of time a piece stays in your showcase before you sell it? Monthly aging reports can help you identify specific items as they become outdated or obsolete. The cost of an item increases over time as you add incremental interest and insurance expenses. Let’s look at an example.

  • Assume you bought a diamond bracelet two years ago for $1,000 and you tagged it with a retail price of $1,800 for a gross profit of $800 or 44.4%.

  • Your line-of-credit interest, the money you borrow to finance your inventory, is 9% per year. Interest compounds on an unsold item based on the assumption that your line gets paid down as sales and gross profit dollars come in. Unsold inventory, then, remains as debt.

  • Your annual insurance premium for coverage that protects your $500,000 total-cost inventory is $5,000, or 1% of inventory value.

  • Table 2 shows what happens to your potential gross profit on the bracelet.

As you can see, for every year the bracelet remains in your inventory, its real cost increases significantly. On average, if an item stays in your inventory six years, you can no longer sell it at a profit because the cost of owning the piece added to its original cost exceeds the retail price. Add to this equation the unlikelihood of the item selling at full retail anytime after one year, and it’s easy to see how an item like this bracelet might be sold at a real loss.

What if, at the end of the first year, you put the bracelet on sale at a 20% discount and offer a $25 spiff to the employee who sells it? You’d probably increase your chances of selling the piece. Consider the numbers:

As you can see, promoting the item this way after one year still captures nearly the same gross margin dollars as you would if you sold the piece at the full retail price after four years.

Monitor your inventory aging reports carefully, and take the necessary steps—employee incentives, discounts—to move aging inventory while there’s still profit to be made. When all else fails, consider bulking old, unsaleable inventory and selling it to a liquidator to cut your loss on the stock and raise cash for new purchases.

Inventory turnover. You can increase sales by recognizing the categories that turn over quickly and constantly refilling them. A good example is gold fashion earrings. Some jewelers turn this category three to six times a year, while major gold pieces may turn only once every two years. Detailed inventory sell-through reports are easy to construct and simple to read and apply. A report indicating turn well in excess of 1.5 times in a particular category may indicate that a larger inventory could produce even more sales. Turn below 0.75 times per year indicates the need for a close analysis of inventory levels and selection.

Consider using your inventory reports to implement a “never-out” system for basic, high-turning items like diamond solitaires, plain wedding bands, and basic gold earrings. A simple approach is to have one sales associate who is responsible for reading reports, checking inventory levels in selected categories, and placing orders for replacements at least weekly. More sophisticated setups have sales reported via computer directly to vendors, who then ship replacements for sold items. Either way, a never-out system ensures that you always have an adequate supply of your best-selling items. That will help keep your overall inventory turn at an acceptable level.

Monitor inventory turn by department or classification, not as a general, “whole-inventory” number. Set goals for turnover based on each category’s performance. And remember that factors like seasonality, price point, and promotion and advertising will impact turnover results.

Table 1

Diamonds Colored Gems Gold & Platinum Non-Precious Metals
Loose diamonds Loose stones Chains Crosses
Engagement rings Rings Major neckpieces Pendants
Pendants Pendants Bracelets Pins
Earrings Earrings Earrings Miscellaneous
Semi-mounts Bracelets Wedding bands
Diamond fashion rings Fashion rings
Bracelets Charms

Table 2

Year Opening Cost for the Year Interest Cost Addition Insurance Cost addition Year-End Cost Actual Gross Profit
1997 $1,000 $90 $10 $1,100 $700 (38.8%)
1998 $1,100 $99 $11 $1,210 $590 (32.8%)
1999 $1,210 $109 $12 $1,331 $469 (26.1%)
2000 $1,331 $120 $13 $1,464 $336 (18.7%)
2001 $1,464 $132 $15 $1,611 $189 (10.5%)
2002 $1,611 $145 $16 $1,772 $228 (1.6%)

Janice Mack Talcott and Kate Peterson are the principals of Performance Concepts, a company that trains and provides consulting services for jewelers and other specialty retailers.