There are some basic business formulas that you need to be comfortable with to maximize the profit potential of your jewelry store.
It seems as though every independent jewelry store manager / owner can rattle off their gross margin percentage but beyond that it gets a little murky.
To fully understand your business you have to possess a solid working knowledge of some key business formulas.
Basic Business Formulas For Your Jewelry Store
Average Inventory Cost.
Add the beginning inventory at cost each month over a specific period divided by the months in the period.
For example if calculating for a season, divide by 7 or if it is for a year divide by 13.
By using 7 and 13 you obtain an average that is more representative of the entire season/year.
It can be misleading to simply use Dec 31st each year because your inventory is naturally at its lowest point.
Remember to add freight and taxes to the inventory each month.
Cost of Goods Sold.
Take your beginning inventory at cost and add your purchases.
Subtract that result from your ending inventory.
This equals your Cost of Goods Sold (COGS).
Be sure to add any additional cost necessary to get the merchandise into your inventory and ready for sales including shipping and handling or any bench work costs.
The cost of goods sold is subtracted from sales to determine the gross profit.
Gross Margin / Profit.
Total sales minus the Cost of Goods Sold (COGS) equals your Gross Margin/Profit.
Divide gross profits by cost. Example would be $460,000 in gross profit divided by $500,000 in costs equals a 92% Gross Markup.
Gross Margin Return on Inventory Investment.
A good tool to evaluate whether a sufficient gross margin is being earned by the products purchased, compared to the investment in inventory required to generate those gross margin dollars.
Divide the gross margin by the average cost of inventory to get the GMROII.
It is also is known as Gross Margin Return on Investment (GMROI).
Take your beginning inventory at cost.
Add purchases at cost.
Subtract cost of scrapped and lost items.
It is also important to remove your repair business (which is typically 15 to 20% of the average jewelers business) prior to calculating your intentory turn.
Divide that final number by the cost of sales.
The result is the number of times the average inventory is sold and replaced.
The median inventory turn in jewelry is 1.3.
Historically most independent jewelers have struggled to even achieve a one time turn on inventory.
Retail price of jewelry item minus the cost of that item, then divided by the retail price of that item.
Example would be a piece with a retail price of $100 with a cost of $40. ($100 minus $40 equals $60.
Now divide $60 by $100 giving you 0.6. which is expresses as a percentage. In this example a 60% margin.
Open To Buy.
Solid tool to use on rapid reorders and figuring out your budgets before buying trips.
Planned sales for a category plus your planned markdowns plus planned end of month inventory minus planned beginning of month inventory.
Sell Through Rate.
This is expressed as a percentage.
Number of units sold divided by the number of units received.
Stock To Sales Ratio.
Beginning inventory of the month divided by the sales for the month.
The Jewelers Board of Trade for 2011 listed 28,706 jewelry related companies in the U.S. That number represents a drop of 1.3% from last year.
By taking the time to understand basic business formulas it will help to ensure that your jewelry store is still with us in 2012.
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