Managing Your Jewelry Inventory
The whole reason for carrying a jewelry inventory is to make sure that you have sufficient raw material in stock, for the right jewelry item, at the right time.
If you had firm orders for all your work then you would know exactly how much raw materials you would need for each order. But, if you are like most production jewelry designers you will find that you need to keep additional supplies of raw materials and finished goods on hand at all times.
The goods in your jewelry inventory may be new or second hand, paid for , or not paid for — so long as you own them and acquired them with the idea of making them into a saleable product. These goods include your raw materials and work in progress as well as your finished products. If you had to pay freight and cartage to get the raw materials to your studio, then freight and cartage are part of the cost of your inventory too.
Any goods that you have left on consignment with a shop are also part of your jewelry inventory because you still own them until they are sold.
Careful management of your jewelry inventory can have a major impact on your cash flow, production schedule, and profits.
The control of inventory can also be a major factor in the success or failure of your business. If you have too much money tied up in a lot of materials and supplies, you may find that you are short of cash to buy the supplies you need to complete orders for jewelry pieces which are selling well and this may hold up your production schedule until the funds are available.
It may seem like such a good deal to purchase supplies in large quantities because it's cheaper than buying in a smaller quantity, but it's not cheaper if it leaves you short of cash to run your business. The same thing goes for your finished stock. It's no use having hundreds of jewelry items made sitting on your shelf if there's no money left to go to craft shows to sell these items.
The key to a successful jewelry inventory is turnover. This means how many times in a given period, usually a year, you sell and replenish your complete inventory, in other words, how often your investment in inventory turns over.
If your jewelry inventory sits on the shelf for long periods of time then the money you have invested in that inventory sits there as well. With the trends in jewelry constantly changing you may find that the colors or styles of your raw material may become outdated and unusable. Also, if there is too much stock sitting on shelves there is more of a chance for spoilage and breakage.
If you are unable to turn your inventory over at reasonable intervals, then you may find it difficult to come up with the money to purchase fresh materials with the latest colors and styles. Therefore, every time your jewelry inventory turns over, you not only make a profit but you are able to replenish with new stock.
For example, say you invested $1000 in labor and material for a line of jewelry that is put on the shelf and everything sells. You not only get back the $1000 invested in labor and materials but also a percentage of profit in selling the work. Let's say for the purpose of this example your profit ratio is 20% of your selling price. Therefore, for every $1000 of labor and materials sold you make a profit of $200 and the original one thousand dollars goes right back into producing more inventory. If your inventory turns over three times during the year, you will have made $600 in profits. Now if you are able to turn your inventory over six times, which means you sell and replenish the stock six times during the year, you will have made $1200 on that same one-thousand-dollar inventory investment.
The purpose of an inventory control system is to help you to answer three of the most baffling questions a business owner/manager faces:
What should I buy?
When should I buy?
How much should I buy?
It will help you to keep control over two vital areas that can affect your business:
The amount of money tied up in inventory
The correct balance of items in your stock
In order to keep control over these two vital areas as well as what, when, and how much to buy, you need an inventory control system or a set of records of everything that goes into or comes out of your jewelry inventory. At a quick glance your inventory control should tell you which of your products is moving well, when you need to reorder supplies and when to produce more in order to have adequate quantities of goods available for filling orders.
Controlling the inventory of your raw materials can easily be done by attaching an index card to the item of raw material or the bin that contains it. Every time you either add or withdraw the raw material, record the "in" or "out" quantity and have a column showing the current inventory holding of each item. When the end of the month comes along simply value the quantities listed on each card add them up to arrive at an accurate estimate of raw materials.
As you can see in the example above, at a quick glance you can see the balance of each item in your inventory as well as the total dollars tied up in each particular item.
Work In Progress
Keeping track of the inventory of work in progress and finished goods can be just as simple. You should know by now the direct labor and material costs that goes into each unit of finished product in order to set your selling price. Your partially finished jewelry pieces can be costed for inventory by estimating what stage of completion they have reached. If 20% complete, cost them at 20% of the total cost; if 50% complete, cost them at 50% of total cost. Finished but unsold pieces are 100% complete and will be included in your jewelry inventory at total cost. For example, if you are doing an inventory and you know that a certain piece costs you $25.00 to produce, and you are 30% complete, then the inventory value would be: $25 x 30% = $7.50
If you keep a stock of finished goods on hand at all times, then here is a simple procedure of keeping track of your orders and stock balance. It is similar to the "in" and "out" procedure in keeping track of your raw materials, but the columns are titled "orders", "shipped", and "made".
In a loose leaf notebook or binder, prepare a separate page for each product in your stock. At the top of each page list the product you are tracking, the cost of producing that particular product, and the reorder point at which more products should be made.
Below that make five columns sub-titled date, orders, shipped, made, and of course balance. Each time an order is received or shipped, or more of that particular product is made, note it in the appropriate column. Keep a running total in the balance column.
To find out how much investment you have tied up in your stock at any given time, simply multiply the balance by the cost of the product. In the example above, on the sixteenth of October the jewelry designer has $221.00 invested in her balance of finished gemstone bracelets (26 x $8.50 = $221.00). If she follows this procedure for each product in her line she will be able to quickly figure out how much investment she has tied up in her total finished stock. Keeping track of her finished products will also tell her which products are selling well and which are slow sellers.
Each item in your jewelry inventory whether raw materials or finished products, should have a reorder point. When the quantity is reduced to this reorder point, you then reorder that particular item. This will prevent you from falling short of any raw materials and then having to wait as you order more supplies — putting your production schedule all out of whack. If you choose to keep an inventory of finished stock on hand for quick orders or to be ready for a craft show or some other opportunity on a moment's notice, then by also having a reorder point for finished goods will tell you when it is necessary to produce more of a particular item.
Come year end the dollar value of your jewelry inventory is needed to determine your annual net income for tax purposes. Therefore, a physical inventory is needed and should be done as close to the end of the taxable year as possible.
A physical inventory involves the actual counting of all the items in both your raw materials, work in progress, and finished work. The value of each item in your inventory of finished goods should be at what it costs to produce them—not counting the potential profit if they are sold. The only time you would value work at below the cost to produce them, is if they were spoiled or to be sold as seconds.
Keeping a running track of your jewelry inventory as mentioned above helps you to keep a breast of your inventory from day to day or month to month, but for tax purposes you need an accurate count of your inventory. During the year your stock may experience breakage, theft or even small errors in record keeping, and the only way to come as close to 100 percent accuracy as possible is through a physical inventory.
Since inventory represents the cost of work that was not sold, it becomes part of your final gross profit and can therefore increase or decrease your tax liability.
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