We receive calls every week from pawnbrokers who are worried about cash flow after years and years of never having to worry about such things. It is not uncommon for us to get calls and hear the pain in the owners voice as they explain that they do not know how they are going to make payroll in a few weeks or that they are behind on taxes, credit payments or worse. Its hard to believe that pawnbrokers that used to live very well are now faced with having to leverage their personal property or equity and more. We have found that many folks in this position cannot even tell you how they ended up in this position. So what has caused many of these issues and how can they be fixed? Let’s find out together!
What is Causing These Cash Flow Issues?
“I just want to do what I used to do for decades and get the same results as I did in the past and I am pissed off that I cannot”.
That quote is very real and in fact we just heard a version of this on Monday this week after what used to be a cash rich time of the year right after the retail sales season. In a blog that we wrote 8-9 years ago, many people chastised us for the content but have come back around and later admitted that we hit the nail on the head and that they just didn’t want to admit it was true. We encourage you to read that blog as it has been read over 12,000 times since then so we will not go over each of those topics in detail. Instead we will highlight the top 4 things that we believe cause these cash flow issues that have become epidemic in the past 5 years.
The first thing that we see in common with businesses that struggle with cash flow is that they 100% of the time have long term business relationships that have turned into friendships and are they are not serving the business as well as they used to or should. That is why we think the number one reason businesses in this industry struggle with cash flow is Paying for services long term that are not helping you grow and succeed and because of the “friendship” they have developed, they cannot cut the ties. It is normal for us to see pawnbrokers that are paying vendors thousands of dollars a month, each and every month, often times for years and never seeing their business improve. We have seen cases where the business is paying a service or vendor over $200,000 a year for years when someone can do a better job for a fraction of the price and the business owner still cannot cut the cord. “Peace of mind” and “friendship” only goes so far in business and the bottom line matters, so why on earth would anyone keep paying a marketing person, consultant or sales people thousands of dollars a month when their business is in decline? If you keep doing the same thing over and over again with the same people, you will see the same results. That is why we pride ourselves in giving our clients what they need in short term engagements that provide long term successful results. If you have cash flow issues, look at who you are paying every month that isn’t providing a tangible ROI and cut those ties. If you really want to get rid of cash flow issues, take the friendship out of the equation. This is business.
Another issue that we see as the second biggest common factor in businesses with cash flow is outdated and old commission and bonus plans that are crippling the business and its cash flow. To try and grow the pawn business or fix “cash flow issues” in the past, we saw several common and similar bonus and commission plans created long ago. Many owners adopted these commission structures that focused predominately on sales at first. For example, a very common one in the industry is to pay out 2-3% of all sales made. Even though your salespeople can sell, if you sell an item at a loss or for not very much profit you are still losing in the business And paying commission on top of it…. Another thing that is common in the industry was for owners to take it a step further and create a “productivity” based commission that ties in the growth of loans, buys and layaways and sales . Often times the transactions were as simple as “do more pawn loans and sell more merchandise and you make more bonus”. This program has proven to work against itself time and time again without you knowing it and here is why. If you told the average $12 an hour employee that they can make commission by loaning more and selling more, most people have a comfort level of being behind the counter and they will gravitate to the pawn counter instead of sales. A second problem that occurs is that your staff isn’t stupid and they will raise the dollar amounts loaned on items so they get more commission if they are not managed properly and how can you manage 100% of the transactions happening daily. Then, when these items default, we have little or no margin of profit to sell them at and if we pay commission on that sale that has no profit we lose even more money. Lose, lose lose…… and the cycle continues. These programs were designed to grow your business and cash flow, but again this is only true if the pawnbrokers take in the item at the correct price and that the business, instead of just the employee, wins. Often all it did was incentive the staff to take it more items on loan regardless of whether or not the cost the paid was correct. If they took in a lot of items at a horrible margin, and then you had to sell them at a low profit or even a loss, you paid out commission on the front end AND on the sale and washed all the profit away. Lastly, it is also the number one cause of aged inventory for two reasons. first, like stated before, staff prefers to loan instead of sell so items sit and don’t move. Second, human nature is to price items based on cost, not fair market value and we end up overpricing items and they sit on the shelf, don’t sell, and depreciate even more becoming a sunk cost. This is so common that in almost every chain we have worked with today they use one or both of these programs. It is a recipe for failure and closed businesses. Simple pawnbroker training and a new commission structure with Devoted Pawn Consulting can make a world of difference in your cash flow and profitability. Are you ready to change?
A false belief that things will ever change, that gold will always be high and things will always be good is the third contributing factor that we see with almost every company that has cash flow issues. If you were living high on the hog and business was huge 10 years ago, it is human nature to not plan for the fall and things to change and even remodel, open new locations or more. But that mindset can kill you. We always say that a business that isn’t evolving and changing, is dying. In the “good old days” managers and owners became content on the profits and bonuses they were receiving years ago. They were OK with receiving record prices for scrap gold and didn’t monitor the health of the rest of their operation. What inevitably ended up happening was that the price of gold obviously went down sharply to a more normal level in recent years. If you couple that with the fact that competitors moved in, doing all the same things like you did in the past, now brought you in less customers AND less profit. Sprinkle in the fact that your competitors came in hungrier than you and they fought harder for customers, creates a recipe for disaster. Gold prices fell, customers stopped coming in at the rate they used to due to online sales or competition, and profits went down. In addition, a major shift happened where customers began to search online for the same gently used products elsewhere such as craigslist, amazon and E-bay, Facebook Marketplace and more. All of these major shifts dramatically changed the customer experience and the industry and even though all of those are true in most scenarios, managers still ran the business the way they did before and didn’t deviate. Ultimately they were unable to compete with the newer fresher looking stores and competitors that may have been popping up in their market. A simple market analysis and forecast discussion and plan could have helped predicted the vast majority of this and saved tons of money and frustration. Our Group of Pawnshop Consultants help with these issues and many others on a regular basis.
Lastly, the final common factor that we see with business with cash flow issues is that they grew rapidly in times of plenty and not enough time was given to long term planning and sustainability. My mother used to say that “if you give 10% of every dollar made to charity and 10% to savings, you cannot fail”. I agree but in most cases we do not see business save any money in high cash times. Even though pawnshops are cool and unique, and created to have high profit margins, they are not exempt from this basic rule in business. That rule is if you are going to grow your business you need to have a strategic plan in place. It is a little-known statistic, that the vast majority of businesses that fail (and historically 90% of them do over time) do so in or right after a growth period. So back to the original question, how can you fail when revenue and customer counts are at record highs? First and foremost, we believe that not enough strategic thought and planning in most cases by these owners was given to the fact that this industry would not always be at the record-breaking pace that we saw years ago. Seasons always change, business always fluctuates, markets stabilize and competitors move in. This will always be the case regardless of the industry. Next, we believe that these businesses became accustomed to a revenue flow that was not long-term sustainable. For your business to be successful, especially during rapid growth, you need to have a solid people and personnel development plan. Think about it from this perspective. Let’s say you had one store that had 10 great employees. Business is great and you want to expand. You open a second store and you move five of those great employees over to the second store to help it take off and open properly. Essentially what you have done is weakened the talent pool and your rock star store which enabled you to grow your business successfully to the point of opening other locations and that pays the bills currently. Also, because of a lack of planning and training, more than likely you failed to set the table properly for the second store to be as successful as the first one. So your false expectations are that the first location will continue to perform like it used to, and the second one will be almost as good or as good as the first one. Inevitably and sadly you will turn out to be wrong in both areas. Then staff turn over inevitably always happens along the way and because of that you dilute that talent pool even further. A thorough growth and development plan and simple execution of that plan would have prevented this issue, saved tons of issues and staffing problems as well as tons of wasted resource and money. Are you ready to begin to unwind this issue? We can help.
Devoted Pawnshop Consulting Can Help
“In the past, we used to be able to make money and be successful if we were right on 2 out of 10 deals that we did. Now days, you need to win and be right on 9 out of 10 to make money”
Anyone that has spoken to Sam Shocket in the past has probably heard his famous quote above. And he is 100% accurate in this assessment. That is why we at Devoted Pawnshop Consulting teach you and your staff how to “win” each and every transaction with each customer every single day. And yes this is possible. Our desire is to have each and every pawnbroker succeed, be happy, and able to live the life they deserve. The fact of the matter is that we got into this industry with the sole purpose of changing it for the better as we increase cash flow and profitability. But don’t take our word for it. Check out our testimonials and call us at anytime for more details on how we can help.
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