When I graduated from high school back in the Neolithic Age, my uncles pressed me as to what my future plans were. Being a bit of a teenage scamp, I replied that I intended to be an unemployed ski instructor in the summer and an unemployed lifeguard in the winter. That plan didn’t work out too well, but my concept of seasonally balancing my income turned out to be one of my better ideas (though I can’t lay claim to its originality).
Throughout high school and college, I spent my summers working for swimming pool management companies as a lifeguard. I couldn’t work for these companies in the winter, because they only operated in the late spring and summer. Come September, they closed up their pools and the owners went south for the winter. Other companies seemed to be stuck in seasonal ruts as well: ice cream shops, coffee shops, music stores, lawn care,
snow removal, tax preparers, moving companies, and others. The list is endless.
Even some of today’s well-known companies struggled to overcome “seasonality.” When Starbucks opened their first store in Seattle in 1971, they didn’t sell brewed coffee; they only sold beans and brewing equipment. It wasn’t until 16 years later – 1987 – that Starbucks began to sell their signature espressos and lattes along with their beans and brewing equipment. It didn’t take them long to figure out that folks don’t buy much hot coffee in the summer. So, they began to sell iced coffee concoctions to bolster summer sales. Then, they added food; shortly thereafter, they added music. By adding new profit centers, they evened-out the peaks and valleys in their revenues and were able to keep the lights on and workers employed all year.
In order to determine if a new inventory item was profitable, Starbucks had to segregate the item within their accounting system so that they could track its sales and profitability. If they had lumped CD sales together with food sales and coffee sales, they would have no idea which items were contributing to – or detracting from – their bottom line. As you know, some inventory items are more trouble than they’re worth.
Antiques dealers, too, can benefit by organizing their businesses around profit centers. But it’s important to understand that buying new types of inventory is not the same thing as creating profit centers. If you decide to add antique trains and comic books to your inventory, you haven’t added two profit centers; you’ve simply added two new categories to your inventory. However, if you decide to add an antique train department to your business, with dedicated floor space and a serious commitment to stocking and selling trains – then you’ve added a profit center. Here’s the difference: Profit centers are tracked as if they were separate businesses couched within your primary business. Profit centers are tracked through your accounting system. Each profit center is listed as a separate line-item for sales, costs and expenses. By tracking in this fashion, you can look at your income statement and know which categories contribute positively to your profits and which don’t. Just like Starbucks does.
For antiques dealers, profit centers can be either inventory-based or activity-based. Inventory-based profit centers are organized around product groupings like “furniture,” “art,” “comic books,” “baseball cards,” or any items that might be a separate focus for your business. Your income statement would list sales, costs, and expenses separately for each of the categories. But – and here’s the big caveat – it’s only necessary to do this if doing so will provide you with meaningful information for the management of your business. Tracking these items separately will enable you to look at your income statement and see, for example, that you make more money selling comic books than furniture. Further, you may see that considering the space that each category takes up, you might be better off cutting back on furniture and dedicating more space to comic books. You can’t make that distinction if all of your sales are lumped into one category called “sales” and all your costs are lumped into “cost of goods sold.”
Activity-based profit centers might include a retail storefront, online sales, antiques shows, auctions, or wholesaling – any activity that shares the same inventory. It’s best not to mix activity- and inventory-based profit centers; the tracking gets too confusing. Use one system or the other.
When tracking costs for activity-based profit centers, a major consideration is to keep track of labor costs (including your own labor; you don’t work for free). Breaking out these profit centers within your accounting system enables you to clearly see where you’re spending all of your time and money, and which activities are the most worthwhile.
Many dealers who sell at antiques shows keep a separate profit and loss (income) statement for each show, and that’s a good practice. If shows are a regular and consistent part of your business, you can create a profit center called “special events” or “shows” as a line item on your income statement so that you can see the profit impact of these activities on your business as a whole. Any activity that is regular and consistent in your business can be segregated as a profit center.
In my next column, I’ll explore how having your business segregated into profit centers enables you to create a spreadsheet “crystal ball” which you can use to examine “what-if” scenarios like: What if I raised/lowered prices in one inventory category? How much would sales have to increase if I added an employee or offered someone a raise? Can I afford to add more shows to my annual itinerary? What would my margins and sales have to be in order to afford an upcoming increase in my rent?
In the meantime, have a chat with your accountant about creating profit centers for your business.
|About our columnist: Wayne Jordan is a Virginia licensed auctioneer, certified personal property appraiser, and accredited business broker. He specializes in the valuation and liquidation of estate and business assets. His column Behind the Gavel appears in every issue of Antique Trader. Learn more at www.waynejordanauctions.com, 276-730-5197 or email@example.com.|