Advice for Pawnshops – Scrap Metal Inventory

Down

Yesterday a business associate and friend of mine shared an observation with me I feel you may benefit from knowing. Tony Gallo, head of Sapphire Risk Assessment Group http://tonyrgallo.wix.com/sapphire-protection specializes in on-site security assessments for high risk small businesses including pawnbrokers. Highly qualified I’d say. He spent over 15 years as the director of loss prevention and safety for one of the public pawn broking companies. Lots of experience there.

Because of this Tony gets to see a whole lot of pawnshops. He told me it’s been his experience recently to discover numerous pawnbrokers sitting on a disproportionate amount of scrap metals in their business. And their biggest reason for doing so? They did not scrap the lot before the downward trend hit mid-2012 and now they are upside down on their investment in the metal.

So today’s tip to you is why I feel this is a costly mistake. First of all, sitting on the scrap heap will heavily skew the numbers you should be managing your business by. Metrics like return on inventory investment, aged inventory, and inventory turns per year to name a few. Usually a significant investment sitting there like a lump of coal on your financial statement.

So what could you do? Simple, cost averaging. I learned this in the late 1970s when there was a temporary spike in metal markets and showed more profits in my pawn shops after the spike than I did before. This is accomplished by adding to the scrap lot with more recent purchases and pawn defaults until the average cost of the lot will show you a modest profit refining it.
Then allowing you to take this investment and reinvest it in your business where it will show you stronger returns. Beats the hell out of fretting over a bad bet. But what if you still insist on playing the market, one that’s been proven rigged, and decide to go with the ‘what goes down must come back up’ philosophy? Your business, your investment, and your risk.

If this is your choice I would at least suggest you ship out your upside down scrapheap and have your refiner return your results back to you in coins and/or bullion. Why is this? Numerous reasons. Coins and bullion are far easier to account for in your inventory. Much simpler to keep track of. And remarkably faster to sell when you choose to do so. Call it loss prevention 101.

But even if you choose to do this please realize this inventory investment is on your books and showing you no return. In the Pawn Shop Advisor(tm) http://pawnshopadvisor.com/ coaching program I shared numerous systems with my clients on how to realize a dependable predictable return on their inventory investment using my turn and burn philosophy. No theory here.

You cannot eat theory. I consider today’s tip especially valuable because it’s been my experience with many new clients who are sitting on far too much inventory with far too little return. But again, your investment, and your choice. Just keep in mind too much dead inventory is like a heavy weight doing its best to knock out the profits in your financial statement. It’s your choice whether to do something about it or continue to agonize your business over a bad bet.

Keep your eye on the target and your mind on the goal,

Steve Krupnik, Cloud Ten Inc.

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