In the jewelry business, the memo enables goods to flow between suppliers and retailers. Cash is absent from the process until a sale is made. While this carries risks, it’s possible that without memos, the jewelry industry as we know it would not survive. The nearly indispensable practice deemed too risky by banks and other lenders has been used by generations of jewelers.
The memo enables retailers to keep a large amount of goods in inventory, usually diamonds and other precious stones. Such expensive stock would be too capital-intensive for most retailers to maintain, but by not keeping such an inventory, they stand to lose sales. If the memo practice ceased, there would be a massive run on capital, as memos free up cash from inventory and thereby enable funds to run freely.
The honor system
Similar to a typical business invoice, the memo lists goods that are “loaned” on a consignment-like basis from supplier to retailer — frequently for an unspecified period — while also noting pertinent information about the items. As money changes hands only once there’s a sale, the supplier may wait a long time to be paid; however, storing items in a vault keeps them out of the hands of customers and hinders the ability to make sales. The supplier effectively trusts the retailer, with the expectation of getting paid when the sale takes place, making the memo a de facto open-ended invoice.
Memos serve as a form of protocol between supplier and retailer. While paperwork is involved, at their heart, memos are often issued on reputation-based credit on a case-by-case basis. Almost exclusively used for precious stones and finished jewelry, the memo documents the item, its condition and other data. It is the retailer’s obligation to pay for goods promptly when they sell and to return the remainder when it’s no longer needed. This is where accurate inventory management and regular communication is critical.
A retailer might hold precious stones on memo indefinitely. Some retailers have been criticized for being too lax with their treatment of memo goods. Since they have not paid for them, they may not be as concerned about selling them as they are about goods they’ve purchased.
Minimizing mishaps
Some suppliers say less than 1% of their memo deals have backfired, largely due to their exercising extreme caution when selecting retailers.
Technology can also help identify stones that are part of a memo transaction, since theft and fraud do occur. Common scams include building a retail relationship on lower-priced items and then swindling the supplier in a variety of ways once higher-priced goods have been delivered.
A jeweler’s block insurance policy can cover losses arising from most memo-related mishaps. Typically, theft, robbery, fire, shoplifting and several other causes of loss or damage are included, as is coverage for salespeople, transit, customers’ goods, and goods on memo. However, fluctuating values can sometimes make it difficult to settle on the value of a lost or stolen item.
Tracking the goods
An accounting firm with jewelry-industry expertise can add efficiency to the memo process. It can provide regular updates regarding the status of goods on memo, the length of time they’ve been with a retailer, customer contact information, and tracking that includes prompt notification of when an item is sold so the memo can be converted to an invoice. Additionally, the firm can assist with the selection and implementation of a computerized memo-tracking system.
Robert Hoberman is managing partner at Hoberman & Lesser, an accounting and advisory firm in New York City.
Article from the Rapaport Magazine - July 2018. To subscribe click here.