Because buying a new display is like any other investment of capital, its rate of return must be measured annually in order to weigh the soundness of the decision. Then, if a display’s ROI (Return on Investment) is unsatisfactory after a couple of years, you might liquidate it and replace it with another display that is expected to perform better.
The approach is no different than what you would do with an underperforming mutual fund. Here are some investment guidelines that, when used in concert, form an investment system that will serve you well.
The best way to look at spending $10,000 on a display is to consider it as one of several reasonably safe investment possibilities. Indeed, the three yardsticks by which to measure any investment are: (1) safety, (2) liquidity, and (3) yield.
For example, a savings passbook loan is safe because the government insures it now up to a $250,000 loss. It’s also liquid in that you can draw out the funds during regular banking hours; however, the return – or yield – is very low.
Certificates of Deposits have higher returns but have less liquidity, typically turning over at six-month, 12-Month, two-year, or five-year intervals. Money market funds may have generally higher yields and greater liquidity than CDs.
Over time, real estate historically has brought still higher yields, but it is not nearly as liquid and much riskier.
During severe recessions, real estate has even declined in value – sometimes by as much as 30-50%. It’s one good reason why SEN advocates that members refrain from buying a building for their business, but have an “emergency fund” instead equal to at least six months of fixed overhead expenses (which includes owner’s salary). These funds should be invested in a liquid portfolio that can be accessed within three to four days. This corporate emergency fund should also be in excess of your retirement accounts.
Investment Display Life
In comparison, a kitchen display investment for a going operation should be as liquid as a Certificate of Deposit, but not nearly as safe. After all, there is no guarantee that a specific display will generate any return.
Most displays can possibly carry an investment life of five years, although in some cases it may be as little as two to three years. Beyond that point, styling and product innovations usually have diminished the value of that investment.
However, over the average five-year period of investment, the reward (yield) should be considerably higher for the risk involved.
In my judgment, the return in dollars should have at least equaled the original amount of the capital investment…or a 20% average annual return on the display investment.
In accordance with a NKBA position paper, be reminded that displays are to be held as a Current Asset on your Balance Sheet – not to be depreciated. That’s because most dealer-owners can earn a small profit when displays are ultimately sold.
Investment System Steps
When investing in a $10,000 display, then, a 20% average annual return over five years would mean $2,000 of net profit generated yearly by the display. The following represents the three steps involved in charting the return of a showroom display:
Step 1: Calculate the required sales volume from the display to achieve a 20% return or $2,000 in net profit. If your financial records show an historical 4% pretax net profit, then the calculation would be as follows:
On the other hand, if the historical net profit were 2%, then $100,000 in sales would be the annual objective ($2,000/.02).
Step 2: Maintain a Display Sales Analysis Chart. In the sales recording process, sales designers must attribute which display was most responsible for generating the final sale. Then the sales volume can be tabulated for the year. Note that it’s very possible a particular design element of a display, and not the cabinet brand shown, may have triggered the sale – or that the Cabinet Comparison Display may have exerted the greatest influence on a client rather than a far more expensive display like a “Great Room” kitchen.
Step 3: Maintain a Year-End Display Return Analysis. Combining the results of the Display Sales Analysis Chart and the year-end financial statement will enable an owner to determine the rate of return over the life of the display. The continued tabulation of such a chart will easily point out when the display has peaked and when planning for replacement should be considered. This event usually takes place in the four-to-five year time frame.
The easiest way to sell underperforming displays is to market them to past clients and/or builder accounts. After all, they know the quality of your product lines and the value of your services. Furthermore, they should have earned a preferred purchasing opportunity.
Take the original list price of the cabinetry – say $15,000 – and add 5% inflation for each of the years that it has been in use. Assuming a display has been used for five years, the regular selling price would be $19,200 if it were brand new. Mark it down 50% to $9,600. If you bought the original display at a 50-20% discount, your net cost would be $6,000. So there might be a $3,600 profit opportunity before any possible negotiations.
Send out a flyer with this headline: “Save 50% on Great-Looking Kitchen Display.” The subhead should read: “Perfect For Summer Cottage, Ski Lodge or Investment Property.” Include a photo with the caption that says: “$19,200 Display Now Available at Only $9,600.” In the copy, use provocative words to describe and enhance the display’s appeal. Then indicate there will be a 20% discount off of any additional cabinetry items that would be necessary to complete the reconfigured layout at the customer’s job site.
Marketed like this, displays have been known to be sold within 30-60 days. Any profit should be booked “below the line” in the Other Income Section of your Financial Statement under the subheading of “Gain on Sale of Equipment.”