Managing Inventory As a Dealer

[dicker]

Hi @LawrenceChard

I appreciate you might not want to answer this question in detail but I wondered how you manage your inventory and Profit and Loss.

For example if you had 1000 sovereigns in your inventory bought at different prices I assume you do not have a price booked / recorded against each one. (I could be very wrong however).

How do you judge profit and loss when selling?

I work for a bank and know how this works in an inventory of stock where a price is attributed to each stock purchased (or blocks of stock), but wondered how a dealer manages this?

Best

Dicker

 

[HerefordBullyun]

I can answer this. Its based on his profile picture wether hes in the profit or loss. When his profile picture is showing him stood in his underpants, hes at a loss. When changed hes making a few bob.....

No need to thank me for the insightful comments.... my service is fee free!

[HillWalkerDundee]

 

@dicker

Although each purchase would be recorded by invoice i.e. on a coin by coin, batch by batch basis, you would not be able to sell on that basis.

In these instances, I would expect the sales price to be based on the average cost of stock.

 

[ilovesilverireallydo]

2 hours ago, dicker said:

For example if you had 1000 sovereigns in your inventory bought at different prices I assume you do not have a price booked / recorded against each one. (I could be very wrong however).

How do you judge profit and loss when selling?

HMRC requires us to record bought prices and from whom and where they were sold and how much for. Most days we hedge, however if gold drops a fair bit, we may take that batch out of circulation and in long term storage. If we have to sell at a loss, we mark it against that batch.

[HillWalkerDundee]

1 hour ago, ilovesilverireallydo said:

HMRC requires us to record bought prices and from whom and where they were sold and how much for. Most days we hedge, however if gold drops a fair bit, we may take that batch out of circulation and in long term storage. If we have to sell at a loss, we mark it against that batch.

So, if you had two batches of, say, 1 ounce Britannias. Each batch was at a different price, say, 50 of one batch and 50 of the other batch. If I came in and asked for 100 Britannias, would you sell me 50 at one price and 50 at another?

[ilovesilverireallydo]

10 minutes ago, HillWalkerDundee said:

So, if you had two batches of, say, 1 ounce Britannias. Each batch was at a different price, say, 50 of one batch and 50 of the other batch. If I came in and asked for 100 Britannias, would you sell me 50 at one price and 50 at another?

We would keep at same price as long as we aren’t making a loss. 
we would record them separately in our books 

[Pete]

Simplistic I know but I am thinking along these lines -

A a business I buy 2 sovereigns costing me £300 and £320 so in stock I have inventory that cost £620
In my trading year I sell 1 coin for £350 and retain 1 in stock.

Method (a)
Because I "binned" the purchases I can track the sale to the lower priced coin.
My profit on trading therefore is £350 - £300 = £50 and I have a coin in stock that cost me £320

Method (b)
I cannot tell which coin cost more so I average my cost per unit at £310
My profit on trading is therefore £350 - £310 = £40 and I have a coin in stock that effectively cost me £310

In the profit and loss account method (a) shows a higher profit ( so higher tax to pay ) but the balance sheet is showing higher assets.

In the following financial year I sell the second coin for £350.
Method (a) £350-£320 = £30 profit
Method (b) £350-£310 = £40 profit

Essentially over 2 trading years method (a) generated £50 + £30 = £80 and method (b) £40 + £40 = £80 so no difference.

I guess the clever stuff involves revaluing inventory especially with rapid fluctuations in spot price.
When there is a bull market your inventory can rise fast but if you calculate your profit in a rising market using true cost of metal then your profits will be higher.
Some businesses might not want this.
In a bear market you might elect to use the true cost price of metals and show losses in trade and get tax credits etc.
Somehow I think you would need to establish a consistent formula and stick to it and from the little I know about accounting you cannot jump from one method to another to suit the day.
Whether a dealer values it's inventory at cost price or adjusts for current metals values is not known to me but I assume for balance sheet accuracy the value of precious metals is better reflected at market price rather than cost price and I am sure the clever accountants know which strings to pull to benefit their clients at the expense of the exchequer.

 

 

[dicker]

I like your explanation a lot Pete - thank you.  Are you an accountant?

Best

Dicker

[LawrenceChard]

11 hours ago, dicker said:

Hi @LawrenceChard

I appreciate you might not want to answer this question in detail but I wondered how you manage your inventory and Profit and Loss.

For example if you had 1000 sovereigns in your inventory bought at different prices I assume you do not have a price booked / recorded against each one. (I could be very wrong however).

How do you judge profit and loss when selling?

I work for a bank and know how this works in an inventory of stock where a price is attributed to each stock purchased (or blocks of stock), but wondered how a dealer manages this?

 

For annual, fiscal, accounting, we use what should almost be standard, and that is to value our stock at lower of cost or market value. This is consistent, and we don't change it from year to year. It has the effect of smoothing our declared profits, and is tax efficient. The market valuation aspect is somewhat subjective, at least for some sections of our stock.

10 hours ago, HerefordBullyun said:

I can answer this. Its based on his profile picture wether hes in the profit or loss. When his profile picture is showing him stood in his underpants, hes at a loss. When changed hes making a few bob.....

No need to thank me for the insightful comments.... my service is fee free!

Close, but no cigar. Speedos mean a small profit, while a loss would...

...you really don't want to see the photo! 😎 (I hope). 😎

10 hours ago, HillWalkerDundee said:

Although each purchase would be recorded by invoice i.e. on a coin by coin, batch by batch basis, you would not be able to sell on that basis.

In these instances, I would expect the sales price to be based on the average cost of stock.

For things like bullion sovereigns, our average cost is almost irrelevant when it comes to a selling price, or a buy-sell spread.

Let's try a simple example but I will assume "one ounce gold coins", so that spot gold and intrinsic value will be the same.

We buy 100 coins at spot, £1300 each, and we are asking £1310 each for them.

Overnight gold drops £25; our new buy-sell spread would change to buy £1275, sell £1285.

You might think we are losing £15 each on them, and you could be right, but I consider that we lost £25 each on them overnight, but selling at £1285, we are making £10 per coin. Meanwhile if we buy say another 100 (at £1275), that will average our cost.

This simple model makes a few assumptions:

That price swings will average out over a long period of time.

That supply and  demand stay roughly in equilibrium.

That we do sufficient trading volume for the above two factors to work.

In practice, we might also shave both buy and sell prices by, say, £1 if we had too much stock, or add £1 to each if we needed more stock.

 

 

8 hours ago, ilovesilverireallydo said:

HMRC requires us to record bought prices and from whom and where they were sold and how much for. Most days we hedge, however if gold drops a fair bit, we may take that batch out of circulation and in long term storage. If we have to sell at a loss, we mark it against that batch.

This does not apply for investment gold, it mainly applies for VAT purposes on secondary market special scheme taxable goods. (Almost anything except investment gold). This can be done on a "global" basis, except for some very high value items.

7 hours ago, HillWalkerDundee said:

So, if you had two batches of, say, 1 ounce Britannias. Each batch was at a different price, say, 50 of one batch and 50 of the other batch. If I came in and asked for 100 Britannias, would you sell me 50 at one price and 50 at another?

From the example I gave above, you will see that our cost price harldy affects our selling price.

7 hours ago, ilovesilverireallydo said:

We would keep at same price as long as we aren’t making a loss. 
we would record them separately in our books 

Whereas, we accept that for "commodity" goods, we sometimes make a loss, and we accept that as part of the job of making a market.

4 hours ago, Pete said:

Simplistic I know but I am thinking along these lines -

A a business I buy 2 sovereigns costing me £300 and £320 so in stock I have inventory that cost £620
In my trading year I sell 1 coin for £350 and retain 1 in stock.

Method (a)
Because I "binned" the purchases I can track the sale to the lower priced coin.
My profit on trading therefore is £350 - £300 = £50 and I have a coin in stock that cost me £320

Method (b)
I cannot tell which coin cost more so I average my cost per unit at £310
My profit on trading is therefore £350 - £310 = £40 and I have a coin in stock that effectively cost me £310

In the profit and loss account method (a) shows a higher profit ( so higher tax to pay ) but the balance sheet is showing higher assets.

In the following financial year I sell the second coin for £350.
Method (a) £350-£320 = £30 profit
Method (b) £350-£310 = £40 profit

Essentially over 2 trading years method (a) generated £50 + £30 = £80 and method (b) £40 + £40 = £80 so no difference.

I guess the clever stuff involves revaluing inventory especially with rapid fluctuations in spot price.
When there is a bull market your inventory can rise fast but if you calculate your profit in a rising market using true cost of metal then your profits will be higher.
Some businesses might not want this.
In a bear market you might elect to use the true cost price of metals and show losses in trade and get tax credits etc.
Somehow I think you would need to establish a consistent formula and stick to it and from the little I know about accounting you cannot jump from one method to another to suit the day.
Whether a dealer values it's inventory at cost price or adjusts for current metals values is not known to me but I assume for balance sheet accuracy the value of precious metals is better reflected at market price rather than cost price and I am sure the clever accountants know which strings to pull to benefit their clients at the expense of the exchequer.

 

That's an excellent analysis, except that I prefer to use Method (c), sell the higher cost, retain the lower cost.

1 hour ago, dicker said:

I like your explanation a lot Pete - thank you.  Are you an accountant?

I hope he's not an HMRC inspector! 😎

 

I may be out-dated, but it seems that PLCs use a completely different approach.

They buy one coin for £300, one for £320, price them at £350 each, and book £80 profit instantly, assuming that they will sell. Shareholders are happy, Taxman is happy, Directors get their bonuses. Hopefully the auditors don't notice, or are compliant. It all works unless the music stops suddenly one day. 😎

[Foster88]

6 hours ago, dicker said:

Are you an accountant?

Ahhhh the dreaded accountant.

The necessity but also the bringer of bad news of every business. 😬

(I don’t mean any offence to anyone who is an accountant.)

Edited October 5, 2021 by Foster88

[ilovesilverireallydo]

4 hours ago, LawrenceChard said:

This does not apply for investment gold, it mainly applies for VAT purposes on secondary market special scheme taxable goods. (Almost anything except investment gold). This can be done on a "global" basis, except for some very high value items.

We have been specifically asked to record this unfortunately 

[dicker]

Many thanks all for the information, satisfied my curiosity!

Best

Dicker

[HerefordBullyun]

1 minute ago, dicker said:

Many thanks all for the information, satisfied my curiosity!

Best

Dicker

I take it you are going to get Mr chards advice and pop some speedo's on too then

[dicker]

2 minutes ago, HerefordBullyun said:

I take it you are going to get Mr chards advice and pop some speedo's on too then

Nothing would give me more pleasure!

[dicker]

@HerefordBullyun Do you also post on arrse?  I recognise the military humour.

[HerefordBullyun]

7 minutes ago, dicker said:

@HerefordBullyun Do you also post on arrse?  I recognise the military humour.

No. I dont bother I used to years ago. I came to a better place - TSF

Edited October 5, 2021 by HerefordBullyun

[dicker]

7 minutes ago, HerefordBullyun said:

No. I dont bother I used to years ago. I came to a better place - TSF

I enjoy your humour.  Keep it up!

[HerefordBullyun]

1 minute ago, dicker said:

I enjoy your humour.  Keep it up!

Good. Here for good time not a long time! There is absolutely no malace in my posts to anyone. Just playful bants and a laugh. Gotta lighten the mood....

Lifes too short. Bit like my late dad, he moved in mysterious circles, but main reason why he did, he had one leg shorter than the other!

[LawrenceChard]

4 hours ago, dicker said:

I enjoy your humour.  Keep it up!

Humour? He's being serious! 😎

[LawrenceChard]

4 hours ago, dicker said:

Many thanks all for the information, satisfied my curiosity!

Best

Dicker

You're very easily satisfied. Are you sure you don't work at one of the Big Four auditors? 😎

[LawrenceChard]

9 hours ago, ilovesilverireallydo said:

We have been specifically asked to record this unfortunately 

Yes, I think it depends on many factors, including transaction count, average value of purchases / sales, business systems, percentage of special scheme transactions by volume or value compared with the overall total.

From memory dealing with SS, HMRC inspectors have some flexibility in agreeing procedures with businesses, although I also suspect they will often ask for more than they need. If what they require is too onerous, you could always ask then to review things, although of course, there is no guarantee they will agree.

[ilovesilverireallydo]

3 minutes ago, LawrenceChard said:

Yes, I think it depends on many factors, including transaction count, average value of purchases / sales, business systems, percentage of special scheme transactions by volume or value compared with the overall total.

From memory dealing with SS, HMRC inspectors have some flexibility in agreeing procedures with businesses, although I also suspect they will often ask for more than they need. If what they require is too onerous, you could always ask then to review things, although of course, there is no guarantee they will agree.

I believe it has to do with too many refiners were melting sovereigns when gold was in high demand recently. We arent the only ones. 

[LawrenceChard]

7 minutes ago, ilovesilverireallydo said:

I believe it has to do with too many refiners were melting sovereigns when gold was in high demand recently. We arent the only ones. 

You melt sovereigns?

[Pete]

I quote a small section from the earlier post by @LawrenceChard

Let's try a simple example but I will assume "one ounce gold coins", so that spot gold and intrinsic value will be the same.

We buy 100 coins at spot, £1300 each, and we are asking £1310 each for them.

I know this example is purely for keeping the maths simple but how nice would that be - gold at spot + less than 1% !!!!!

In practice, we might also shave both buy and sell prices by, say, £1 if we had too much stock, or add £1 to each if we needed more stock.

... and it gets even better !!

Offer gold coins at 1% over spot and you will get my attention ...

😉

[LawrenceChard]

5 minutes ago, Pete said:

I quote a small section from the earlier post by @LawrenceChard

Let's try a simple example but I will assume "one ounce gold coins", so that spot gold and intrinsic value will be the same.

We buy 100 coins at spot, £1300 each, and we are asking £1310 each for them.

I know this example is purely for keeping the maths simple but how nice would that be - gold at spot + less than 1% !!!!!

In practice, we might also shave both buy and sell prices by, say, £1 if we had too much stock, or add £1 to each if we needed more stock.

... and it gets even better !!

Offer gold coins at 1% over spot and you will get my attention ...

😉

Yes, it was to keep things simple, but also to save me time writing it. On our websites, I might spend half a day writing a page about it, but on a forum, even on TSF, I try to do it quickly, and even then what takes 1 minute to read might have taken me 30 minutes to write.

!Offer gold coins at 1% over spot and you will get my attention ...".

It does happen!

P.S. Do you want 100 Krugers at 1% over spot? Immediate payment.