Chapter 1
It Doesn’t Take a Prophet
You do not need divine intervention. You do not need to be a Prophet to make a Profit in the shop. However, before you can increase the profitability of the shop you must know how to determine profits. That takes a little accounting knowledge.
There are three items to consider, when evaluating the value of the shop.
- Profitability
- Return On Investment
- Cash Flow.
Profitability
To determine net profit or pre-tax profit of the repair department use the following financial formula:
Total Income - Total Expenses = Net Profit |
Profit can be stated as this dollar amount or as a percentage of income. This percentage is called the profit margin. To determine the percentage, divide the amount of profit by the total income. The resulting number is the Profit Margin.
Net Profit - Total Income = Profit Margin |
Although this seems like an extremely simple formula, the difficulty lies in the manner bookkeeping is kept in most retail jewelry stores. Not only are the numbers difficult to locate, what to include in the numbers is often confusing.
Total Income
In determining the total income for the shop, you must include the amount of work preformed that money is not collected. To determine the true profitability of the shop, credit must be given for all work completed. The repair department in many stores becomes a dumping ground for all free work relating to the sales of new merchandise.
For example: A woman came into a store wanting to have diamonds pavé set into her gold dome ring. The storeowner sold her 20 one point single cuts, as the customer did not want to spend much money. The store had a keystone mark-up on these diamonds, and a store policy to set at no charge all stones sold. The retail price of the one point single cuts was one half the price on the store's price list for pavé setting. The store was loosing money on this sale. However, the owner did not give it a second thought. His diamond department made a profit and repair departments loose money anyway.
Another store was doing a good business in charms or so the owner thought. He sold silver disk charms at keystone for $20. The store policy was to engrave and solder the charms onto a bracelet at no charge. For his $10 gross profit this storeowner was giving away $20 of shop labor.