Knowing Your Figures 101
By Malcolm Alderton
For years many years jewellers have been running their Stock Control from the heart (this ring is beautiful, I know I can sell it so I will buy it), and long may this continue.
However, business is tougher today, so it's important to apply more logical thinking with your head as well as the heart. This means understanding figures that apply to your business (you cannot improve on what you cannot measure, and you cannot measure without understanding basic figures).
Sales are pretty well self-explanatory, however, they're much more than to sales than just sales. Sales are made up of two figures, 1 - Average Sale and 2 - Quantity Sold:
Average Sale $400 x 2500 quantity = $1,000,000
Average Sale $600 x 1667 quantity = $1,000,000
If your sales are down by 10%, is it due to selling fewer items (less quantity), or because your average sale has dropped…or both? If you don't know which, how can you take action to address it.
The flip side of the coin is if your sales are up by 10%, is it due to selling more items (more quantity), or because your average sale has increased. If you don't know which, how can you build on what’s working?
Laybys - If you treat laybys as sales when they are put aside then the layby is treated as a sale in your General Ledger (Profit and Loss) when it is started, regardless of when the payments are made. If you treat laybys as a sale when it is fully paid then the sale, while started in one financial period may be treated as a sale in another financial period.
Cost of Sale (COS)
Typically, the time-honoured method is Opening Stock at Cost at start of period plus Purchases less Closing Stock at end of the period, as per the following example.
Gross Profit (GP)
GP is Sales less Cost of Sale, e.g.:
Opening Stock. $800,000
Plus Purchases. $600,000
Less Closing stock ($900,000)
= COS $ 500,000
GP $ 700,000
There is a common misperception that by not buying stock towards the end of your financial year, you will lower your stock and therefore you will have less taxable profit. This is NOT TRUE. If your Purchases are down then you Closing Stock will be correspondingly lower thus your GP will be exactly the same.
Stockturn is the end result of a calculation. In short, it is the COS for 12 months divided by Closing Stock at Cost.
Example Annual COS is $500,000
Closing stock $500,000
Stockturn = 1.0
I have often heard jewellers say, my sales are $1,000,000 and my Stock is $500,000, so my Stock turn is 2.0. This is because they are not comparing apples with apples. You must use COS not Sales in the calculation.
GP%. Vs Mu%
A question I am often asked is "What's the difference between Mark-up percent and Gross Profit percent?"
Mark-up% is what you add on to the cost, while GP% is the part of the total price that is the Profit.
Using a simple example will best explain the difference. Let's say you buy an item for $100 and sell it for $200
The Mark-up % would be 100%
The GP% would be 50%
Mark-up% is an easier form to use when it comes to marking up stock. It also relates to mark-up factor, for example marking up 2.7 times cost is adding 170 mark-up. It is also better to use when comparing Stock performance department by department, supplier by supplier, salesperson by salesperson (to see who is discounting the most).
GP% is used in accounting to show expenses as a percentage of sales, for example, COS is 40%. Wages 12%, marketing 12%. This enables you to compare your costs as a percentage of sale against previous years.
Return On Investment
Gross Margin Return On Investment (GMROI) is a figure used for comparing performance of departments and suppliers.
If you have $1m in money to put in a bank account, you would look to invest it in the bank that gives you the highest interest rate. This resulting interest rate is called ROI. For example for a 12 month period, 1.8% interest would give you $18,000 while 2.4% rate would give you $24,000 in interest, $6,000 more for no work, only a better decision.
Looking at your business, you have money invested in different departments of stock, for example, watches and gold chain. Which of these is giving you the best GMROI. Is one giving you a really good GMROI while the other a poor GMROI, so the question of how do you calculate GMROI. Well, it’s a simple calculation your software should be providing. It is Stockturn x Mark-up achieved. For example, your watches may be giving you a lower mark-up than your chain, but the stockturn is higher than the chain, with watches showing 90% mark-up x 2 stockturn resulting in a GMROI of 180. Chain is giving you a much better mark-up of 130% but only a stockturn 1.3 resulting in an GMROI of 169. I hear jewellers say the mark-up on watches hardly make them worth stocking, but when you look at the above typical example, watches are giving you a better GMROI than chain. Extend this exercise to all your stock departments to see which are providing the most, and the least, GMROI.
In particular look at departments that give you the largest percent of your sales. If GMROI is low, it is for only for one of two reasons. Either your Mark-up is too low (maybe too much discounting, or too low of mark-up being added) OR your Stockturn is too low (too much stock for the number of sales or too little sales for the amount of stock... resulting in accumulating old stock).
In any event, today more than ever before, GMROI is an important figure when planning your future. Look at which departments to decrease or increase stock levels in 2017, using 2017 to review your mark-up strategy and your discounting policy.