The Tombstone for Keystone
Adding revenue with strategic markups; using credit cards wisely
By Carol L. Schroeder -- Gifts and Dec, 5/1/2006 12:00:00 AM
Q: I pay for most of my merchandise and store expenses with a business credit card. I earn frequent flyer points, and write fewer checks, but I'm concerned about security now that so many companies have my card on file. Is this is an efficient way to handle my payables?
A: Credit cards are wonderful for business travel expenses and operating supplies. They're also great for avoiding COD charges on first time orders from new vendors, and for buying from craftspeople who don't offer terms. But there are a number of drawbacks that may indicate you should hold back on the plastic.
Many retailers fall into the trap of using credit cards as a source of working capital. But if you're not paying your bill in full each month, chances are that you're paying higher interest on your inventory than you would with a line of credit from a bank. And establishing this type of open-ended loan, which allows you to draw money as needed and pay it back as cash flow allows, will help develop a banking relationship that will be useful later if you need to borrow for other purposes.
It's also easy to buy too much when you have a high credit card limit. To prevent this, create a cash flow budget so you know where the money will come from to pay for merchandise you purchase. It is also a good idea to have an idea of how much money you need to put into each of your inventory categories every month. This type of “open to buy” budget is based on sales projections, and adjusted for starting inventory levels.
In addition, you're right to worry about credit card fraud. Business cards usually carry a very high limit, and it can be difficult to control who has access to a card number that's written on purchase orders at trade shows, kept in vendors' files, and given out to suppliers by fax or phone. In one instance, a store's credit card was used for a shopping spree by someone other than the owner, despite the fact that the card was never stolen.
The security of credit card numbers given out at trade shows is definitely an issue, yet I've noticed that vendors are often unwilling to wait to get the credit card number when the order is ready to ship. Suppliers told me that the person authorized to give out the number is often difficult to track down later. Sometimes, it seems buyers are avoiding the call in order to postpone or cancel the order.
If a small vendor has merchandise ready to ship, there's cost and inconvenience associated with this scenario. I suggest that vendors make a phone call and send a fax, letter or email a week before “picking” the order, stating that it will soon be ready, and that the credit card number is required by a certain date or the order will be canceled. This puts the responsibility back on the retailer.
And what about purchase orders at shows? It's a good idea to make sure your order is in a safe place, rather than being left where it can be seen. Scott Myers of Circa Asia, Novato, CA, takes all his orders out of the booth at night for added security.
Another potential credit card abuse is vendors who continue to use the card beyond the first order. As a retailer, you need to be very clear about what charges you're authorizing. Buyer Cinda Baxter of Details, Ink, Minneapolis, says “There's a serious disconnect with some vendors about exactly who owns the credit card. They seem to think a one-time authorization means carte blanche for future transactions. In the eyes of the law, running an unauthorized charge is no less a crime than taking someone's wallet.”
Read credit card statements carefully to make sure they're correct. And get a second business credit card account, in case you need to cancel the first due to theft or fraud.
Credit Card Care
Q: We've been trying to lower prices to compete with the new Target store nearby, and happily our customers have remained loyal. But our financial statements show we're taking a loss, and I'm concerned that our store won't survive. Can we continue this discount strategy?
A: It's good news that your customer base has not eroded despite the new big box on the block. Now what you need to do is find out if you can continue to attract those same customers without discounting, because even taking “keystone” markup (doubling the wholesale cost) is, in most cases, no longer enough for a retail operation to turn a profit. You'll need a greater markup on your merchandise in order to cover freight costs and to pay overhead.
The secret to instituting extra markups in your store is to apply the practice selectively, because some products are more price-sensitive than others. Look for merchandise where you can get “the extra mark.” Buying goods on sale, or getting specials such as a 10 percent early buy discount, will allow you to set prices beyond keystone on certain merchandise, without disadvantage to the consumer.
In addition, some wholesale prices are easier to mark up than others. For instance, if a product costs $5, I won't usually mark it over $10. But a $2.25 item can go to $5 without seeming overpriced. Vendors can help by offering wholesale prices of $9.75 and $14.00 instead of $10 and $15. We would also appreciate getting slightly more than keystone on pre-priced items such as greeting cards.
Hopefully raising some prices, together with keeping a close eye on expenses, will allow you to become profitable again. Subtle added markup is well worth the price to customers who value the pleasurable shopping experience a specialty shop can offer.
We would love your feedback!
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