When you have overdue vendor payables which are causing you sleepless nights and strained supplier relationships, there is an answer and it’s all to do with managing your Cost of Sales (COS) fund. There are some very strict dos and don’ts which will impact your future Cash Flow be it good or bad.
Some of these Dos and Don’ts are contrary to emotional logic which prevails when debt level is too high, so read on with an open mind.
- DO NOT stop replacing your fast sellers. Fast Sellers are the life blood of your business. Empirical evidence proves if Fast Sellers are not reordered then sales decrease.
- DO NOT stop buying entrepreneurial stock (new stock). Customer like seeing “new” jewelry and a good number of these items will become fast sellers.
- DO have an Open to Buy (OTB) plan that takes into account reorders, memo stock sales, repair sales, stock reduction etc., this is absolutely critical to the control of your future debt level. The lack of a planned OTB has led to the jewelry industry cash flow problems, jewelers who have adopted the disciplines of an OTB are not suffering the same cash flow issues as jewelers who have been operating without an OTB.
Despite the natural instinct to stop buying so you can pay down dept, DO NOT STOP buying (thus using COS to pay down debt) as this will result in a huge negative impact on your future cash flow.
So, how do you pay down overdue vendor debt? Like the bear which lives on fat while it hibernates for upwards 100 days, jewelers have enough fat (old stock) on their shelves to pay down supplier debt. ARMS surveys over the past 20 years have consistently shown 74% of all sales come from inventory less than 6 months old and 96% of all sales come from inventory less than 18 months old, so who needs stock older than 18 months. It is this stock over 18 months old that can be turned back into cash without having to spend money on replacing it and it is this money that can be used to pay down debt without hurting your future sales. Most jewelers have far more fat than overdue debt, so an immediate plan to identify this inventory, categorize it and start the liquidation process is necessary.
First step to liquidating old stock is to disconnect the emotional attachment of this “beautiful” old jewelry and be prepared to accept less than you paid for it. I often hear the cry “I am not selling this below cost and losing on it” My answer is, “are you not better to take a 10% - 20% hit on the cost and reinvest the money in something that may well make you keystone…. or better still pay down debt to save interest and vital supplier relationships”.
Second step - Clearly identify what stock is over 18 months old then run a Stock liquidation sale. Organized correctly an ARMS three day stock liquidation sale can bring in an average months income, all in three days of selling old stock only – and this stock does not have to replaced as it stock that customer did not want so the proceeds can be used to pay down debt.
Watches and Giftware, the most difficult category, but also not normally a high % of old stock. Use these as loss leader to attract customers to your sale. A $895 watch advertised at $99 will bring in even the most hardened discount shopper, and they will purchase other bargains if the watch has been sold. The difference between the $450 cost of the watch and the $99 you get for it, write off as marketing to get customers in to the sale.
What’s left after the sale is then categorized into two categories:
- Metal (old chains, gold earrings, rings etc.) that can be turned back into cash quickly (it is not unusual for a single store to have $100,000 plus in gold jewelry at cost that is over three years old. This can be turned back into cash very quickly.
- Diamond set jewelry – if this jewelry has been through a sale and still not sold then look at popping the diamonds to be used in future repairs and new semi mounts. Add the old mounts to the old gold to be sent to a refiner. You may want to save some bands to use for sizing jobs.
DO NOT have a discount counter that you encourage you team to sell from, this will cost you untold profit.
Bottom line. DON’T stop buying inventory as this only results in sellable inventory disappearing off your shelves leaving aged inventory your customers have told you month after month they don’t want by not buying it!!
DO liquidate old unsalable inventory to pay down debt, because it is this old inventory that is causing overdue debt levels.