28 Oct

A Case Study: Their Business Was Heading For Failure…

Bill and Cindy were a husband and wife who always dreamed of owning a business.  After getting an operating capital loan from an Internet bank they bought a franchise and went to work.  Things looked very promising for them as they quickly started selling their services with projected sales exceeding $170,000 for their first year.  They even hired a Coach who promised to increase their sales by 10 fold.  When Bill and Cindy began to realize they were losing money rapidly and were depleting the cash they had received from their operating capital loan they reached out to me.  Their business was heading for failure and they were on the verge of losing everything.

WARNING!!!  Facts are used in the following – this is a real-life situation where only the names have been changed.

They reached out to me based on a referral from a mutual acquaintance.  I began my work with them by understanding their business.  This is what I learned:

Category Starting Position
Employees 6 (including Owner)
Managers 1 (Owner)
Revenue $175,000
Cost of Goods Sold $152,250 (87%)
Margin % 13%
Gross Profit $22,750
Net Profit -$32,000

 

Their average monthly sales are about $14,500.  Every time they sold something the business lost money, the more they sold the more they lost.  They could not save their business by selling more.  They fired their Coach.

Our next step was to learn their process.  We had to understand how they provided the service they did, what it cost and more.  Over the course of the first few weeks, we looked at every step and not only at how long it took them but also what each step cost them to include the materials and other costs that the business had. The results were not surprising, they cost to provide the service exceeded what they were charging by a factor of almost 3:1, in other words for every dollar they charged it cost them $3.  I also learned that they were operating the business in a manner that the Franchisor had never intended.  As Bill told me, he didn’t like the Franchisors way and he decided to do it “his way.” We hadn’t even begun to look at their other expenses.

When we began to look at the other expenses of the business.  As is sometimes the case with newer businesses these expenses were excessive.  They were not normal start-up business expenses that one normally sees.  Supplies, for example, were being purchased retail and often were wasted due to poor storage, and poor management of their use.  There were too many employees for the business at its current operating level and Bill was paying himself an extensive salary.   Also, “Business Development and Marketing” activities were, to use a technical term, “Wonky.”  A large amount of money was being spent on meals and entertainment because, according to Bill, “That is what a business owner does, right?”

For the next several months Bill’s life was very uncomfortable as we worked together to repair his business and return it to profitability.  We eliminated two employees, streamlined his process, eliminated waste by better managing the purchase of supplies and materials.  He continued to operate the business differently than what the Franchisor wanted and working together we made Bill’s vision of it working his way a success.

In the end, after 9 months, this is what we accomplished:

Category End Results
Employees 4 (including Owner)
Managers 1 (Owner)
Revenue $265,000
Cost of Goods Sold $165,000 (62%)
Margin % 38%
Gross Profit $100,700
Net Profit $33,231

 

You will notice that his revenue increased as did the dollar value of his Cost of Goods Sold.  Yet the percentage of his cost of Goods Sold was reduced from 87% to 62%.  His Margin, or Gross Profit, was increased from $22,750 (13%) to $100,700 (38%) and his Net Profit, the bottom line, was doubled from a -$32,000 to $33,231.

This success was accomplished by completely understanding Bill’s business and by using solutions that were developed based on facts about his business and not catchphrases such as “sell more to make more.”  By using facts instead of emotions Bill’s business is now a success.

Operating a small business is hard.  Bill and Cindy learned that and trying to overcome their lack of knowledge an experience hired a Coach to help them.  The Coach didn’t take the time to truly learn their business or what exactly was happening inside the business.  Had they, perhaps Bill and Cindy would have enjoyed success sooner.

The message here is simple, successfully operating a business cannot be done by simply selling or selling more.  You must also pay close attention to your expenses and processes.  If you don’t know how to do that ask someone who does.