"How much should diamonds be marked up?
This question was asked on Polygon and I thought you'd like to see
Actually I'm working on a column for InStore magazine on that very
subject. We all have been focusing on mark up and for over 75% of
retailing it's a great start. We'd be better off to focus on cash
flow and cash management along with accounts payables management.
Things will be great as long as you can
1. Pay your bills on time.
2. Pay for the items you purchase on a timely basis as promised to
3. Restock what was sold.
4. Your debt doesn't rise as a percentage of total assets as your
business and sales grow.
Let's use one example. You have in your store 3 diamonds, they cost
you $1000 and you keystone them for $2000 each.
Let's also say your overhead (expenses) is $2000.00 for the year
(this is hypothetical). So you have to have after selling and paying
for your cost of goods is $2000.00 minimum in gross profit left over
to pay for salaries, rent, etc.
If you sell TWO diamonds at $2000.00 each sales will be $4000 for
the year. Your gross profit after paying for the two diamonds (they
cost $1000 each) is TWO THOUSAND DOLLARS.
You have $2000 left over to pay overhead of $2000. Is everything
Why? You have an accounts payable left over for the THIRD diamond.
You didn't make enough GROSS profit to pay ALL of your bills-all
Accounts payables are not overhead. You have to add overhead to your
accounts payable bills you need to pay this month to be able to be
solvent and happy.
So now let's look at the pictuRe:
Total Sales: $4000.00
Pay for 2 diamonds: -$2000.00
Profit/loss $0.0 (breakeven)
You still owe for the 3rd diamond of $1000.00.
Gee, keystone wasn't enough. You actually need another $1000.00 in
gross profit to pay the $1000 diamond bill. Yes, I know you will sell
it next month but the bill is due NOW. (Just one more month, January,
and you'll be in this pickle.)
What to do? Two things:
1. Raise your markup from 2.0 to 2.5.
Sell two diamonds at $2500 = $5000.00 in sales. (Income)
Pay for THREE diamonds: -$3000.00
Pay Overhead: -$2000.00
Total Spent: -$5000.00
Now you've paid for all three diamonds, all of your bills and you
have one diamond left to sell in January. It's paid for. That $3000
sale in THAT month would give you an "excessive profit" of $3000. But
you didn't make any profit in December, this month, so averaged over
2 months you'd make $1500 net profit per month. You get the idea.
Now let's say the competition won't let you sell diamonds at 2.5
markup. What to do? Lets go to idea number 2.
2. Well right off the bat your BILLS are $3000.00 for accounts
payable and your OVERHEAD of $2000.00 means you need $5000.00 this
month to pay ALL of your bills and break even. Let's say we are not
happy with breaking even and want a net profit and at the moment
let's just say we want a $1000 net profit.
So we need $6000.00 in GROSS PROFIT.
Put that on the board in the break room. We want to track it.
Because of competition this store might have to sell these diamonds
which cost us $1000 for $1800 rather than $2000 or even $2500.
We're stuck? Not really. We'll make $800 per sale. Divide your total
payout (bills due) totally of $6000 by the $800 in profit on each
sale and you need to SELL 7.5 diamonds at $1800.00 each. We have to
sell more than double the units what we used to have to sell. But if
you CAN increase your closing ratio you'll put another $800 in the
bucket with each sale. And on $6000 needed you need only $300 per day
in GROSS PROFITS on a 5 day work week to pay all of bills.
So now you can wheel and deal and meet prices AS LONG AS your gross
profits are $300 per day. Not SELLING PRICE. Why? Because the cost
of goods of the items you sell today have to be used to BUY MORE to
replace what we sold. Tink GROSS PROFITS.
If you sell an earring that cost $400 for $700 (rather than
keystone) you've made the $300 GROSS PROFIT today you needed to pay
ALL bills this month PLUS you have $400 available to buy another
earring for stock.
We should start measuring gross profit dollars, not sales.
It works and is the staple of large companies in cash flow
The downside? No one walks in the store today. So tomorrow we have
to have $600.00 in gross profits to make up for it.
That's why advertising and marketing is so important. Advertising is
not meant to sell product. It's meant to bring humans in front of
You are supposed to sell product.
So during lunch ask the bookkeeper to tell you what overhead is for
December. Then ask "How much in accounts payables do we HAVE to pay
in January for promises we made to vendors on merchandise we bought?"
This basically is the gross profit you need in December to pay
December's bills and have cash left over to pay off vendors in
Not ALL bills, just the ones due in January. If you have merchandise
dated through March, leave out February and March.
Of course you've overbought, haven't you?
Don't buy more than you can afford to:
a. On a monthly basis pay your overhead, and
b. Meet on a monthly basis on time payment of your accounts
Remember, gross sales don't count towards your daily, weekly or
monthly gross profit requirement because you need the cost of goods
portion of the sale to reinvest into another item for the case. Gross
profit is what counts.
Lastly (yeah, right), no one sells only 3 products in a year. That's
why ACTIVITY is more important. Gross profit activity to be exact.
Find out your overhead and then find out your payables for inventory
and equipment and such. Find out how much money you need to pay all
vendors THIS MONTH in total. Employees and you included and also the
other two employees who work for you: Net profit and Taxes.
Post that on a wall. Divide by day or week. Then keep track of GROSS
PROFIT daily and subtract it to keep track.
You will find this will get you thinking of SELLING. What will this
IT WILL INCREASE YOUR TURN, CHARLIE!
You might find on the 28th of the month that you have accumulated
all money for the month.
What will that do? Maybe the remaining three days you don't have to
settle for less profit on these days. In fact 100% of the gross
profit NOW goes into MORE NET PROFIT!
As Forrest Gump would say:
"And that's all I have to say about that!"
P.S. Repairs and custom? If you KNOW your gross profit margin
percentage on that area like I've taught you, use that as your gross
profit. So if gross profit from the shop after paying for salaries
and findings is 55% then shop sales have 55% of the sale attributed
to your daily gross profit need.