Your business had been prospering and flourishing. You and your partners built a machine and the company grew and grew and grew. You became wealthy beyond most people’s standards. Suddenly, the revenue started slowing and the profits dropped like a rock. You scrambled and worked harder than ever. Sales bumped up but now you are in the red. Cash flow feels constrained, and you have to consider financing from your bank. You do not know what to do, but some drastic action is needed and is needed now.
Consider Hiring a Consultant
One of the toughest things we business owners struggle with is to give up control. However, if you are genuinely struggling with profitability and cash flow, we strongly recommend you take a leap of faith and hire a consultant.
First, you should turn to sources that already have a financial incentive to maintain your company’s well-being – your board of directors. Your board of directors can serve as a liaison to find a consultant as well as intercede on your behalf as necessary. Between your CPA, attorney, financial advisor and others, their wealth of knowledge should bring a new perspective to your situation.
When you hire a consultant, there should be an incentive for the consultant to develop profitable changes – make sure there is a large percentage retainer fee based off of performance. The performance should be tiered over time – some changes in the immediate and some in the future.
One of our clients shared her experience with us regarding business consultants.
About a year ago, my husband and I hired a consulting company to come in and give us advice on what to do. Our businesses rock and rolled with the economy. After maximizing our current line of credit, the bank would not give us any further loans. Our accounts receivables stretched farther and farther.
So we found this company located in Illinois to help us out. Everything checked out OK. My husband signed the contract and we could not wait to see how they could help us.
After being in our office one day, they came up with ridiculous suggestions that essentially boiled down to two ideas: We need to increase sales while cutting our expenses.
Gee, it didn’t take a rocket scientist to figure that out. They did not point to specific areas or give advice that would help us today. They had no familiarity with our software, which they said beforehand that they did. Within a very short window of time, we fired them and terminated the contract.
We paid them a nominal sum for their time. Now a year later, they are trying to take us to court saying we breached the contract even though they could not perform relative to what they said they could do.
We wish we would have made the contract more incentive based rather than a flat fee.
We learned from this client that some salary and up-front fee are reasonable, but it should be fairly minimal. After all, you need some help immediately and you will have to pay a fee for it to be implemented immediately.
In addition, if you are looking to get an honest opinion, make sure the consultants make an assessment of you and your effectiveness as a leader and manager.
Lastly, make sure they are an expert in your industry or at least have dealt with similar size organization that functions similarly to yours. We suggest the consultant should be a specialist. If they are a generalist, they will give you general answers.
Work with Your Suppliers and Vendors
In addition to working with a consultant, we found it helpful to work with suppliers and vendors to get short-term help. If you have a key vendor or supplier, give them a call to get together and to get their assistance.
In preparation for these meetings, consider having a turn-around plan they can be a part of. Be prepared to deal with a whole slew of questions.
Let them know how you are cutting the fat and how they figure to be a vital part of your plans. Ask for help by moving out the due dates for the payables you owe them. They may be willing to extend a cash advance if they realize how your company’s problems will affect their bottom line. A sudden drop in the demand for their product and a leading supplier going under is not to their benefit.
Be ready to make a concession. The interested party may ask for an equity stake in your company or the rights to a specific product.
Your CPA or accountant can be a tremendous resource. They often network with business bankers and can be immensely helpful with financial statements. Also, make sure to identify who owes you money. Try to collect on those as soon as possible or work out a payment stream that is amicable for everyone. Your CPA should be a valuable ally in these battles.
Altogether, ask for extensions on your accounts payable and try to speed up your accounts receivable. If necessary, hire a collection company or dedicated an employee to hassle late accounts.
Identify Your Core Strengths and Weakness
As we have grown in business, sometimes we try to be all things to all people. We cannot be all things to all people – we can only be all things to some people. We’ve found that we cannot offer the best service, price, and value and we’ve seen many clients struggle with this too. Think about it for a moment. Are you best at service? Price? Value? In going through these criteria, which two are you best at? We suggest that to pick two and go after those with fervor.
Which segment of your business is most profitable? Where do the greatest sales originate? Eliminate or sell the segment that is not allowing you to focus.
Do you have multiple locations? Do a separate analysis of each location.
Is each branch profitable? If they are profitable, to what degree? Does a business partner’s self-interest get ahead of the company’s interest by maintaining a branch office?
One of our clients who lived in Destin, Fla., was getting extremely frustrated. He was a partner of an architectural firm that had thrived for years. They did both public and private projects, expanding as the years drifted by.
One of the senior partners decided to open a location in Atlanta. The other partners thought it was a splendid idea because of the bigger geographic footprint. At the time, they aspired to be the largest architectural firm in the southeast. Without much thought, they gave the expansion their stamp of approval. The senior partner moved to Georgia to manage the branch. Over the course of a year or so, profitability started to shrink across the entire company. Then, during 2007 and 2008, revenue plunged while expenses were as high as ever. They started examining the financial statements in detail to identify where they could squeeze additional margin. The Georgia branch was not profitable, and they did not understand why.
Our client discovered that the senior partner was not running the business through the parent company, but instead through his own consulting company. To add insult to injury, our client's architectural firm was paying the rent! He became disgusted enough with the situation that he with some of my partners help, negotiated a buy-out of his partnership. Now, he is getting a comfortable monthly paycheck and has avoided the drama with the company.
Learn from his experience and close down unprofitable or marginally profitable locations. If a business partner will not abandon the location and the rest of the partners cannot agree on the company’s direction, that location’s costs need to come out of the partner’s own pocket. Then let’s see how badly the partner wants to keep the branch open. A quality consultant should help offer a thorough opinion of your company’s direction.
Be the Example
The business is hurting and cash flow is stifled. What are you going to do? As the leader of the organization, we feel that major stakeholders (i.e. the CEO, owners) should take the biggest and quickest pay cuts – say 10 percent to 20 percent depending upon who is the highest compensated. This takes guts. It is not an easy decision, but it will pay off in the long run.
You also should consider eliminating or decreasing bonuses in the short-term. If you choose to keep the bonuses at reduced levels, consider making them based on net income and operating cash flow. This puts the focus on the bottom line and day-to-day operations rather than on revenue or operating profit targets. If revenues are up but profitability is down, let’s try something new and make some changes.
In doing this radical shift, you should make this announcement public to the organization if you are asking employees and managers to take a pay-cut as well. They need to know the highest compensated employees took the biggest pay-cut. We feel it is crucial that care not be placed only on the bottom line but also on the employees' well-being.
Another client had to deal with this experience and boy, was it painful. His firm had one of its partners leave about five years ago. Due to a clause in their agreement, the remaining three partners had to buy-out his interest.
Unfortunately, they did not have the cash to do so and instead they took out an unusually large loan. The loan payments nearly crippled their profitability. However, at the end of the day, they did it the right way. Our client and his partners maintained all their staff and instead the partners took a hefty pay cut for the next four years. They took minimal salary draws and during tough periods there were times when they did not get paid at all. Truly, it was not easy, but they got through it.
If you have to make pay cuts in addition to your own, we suggest that the management pay cut should be one half of the percentage of what your pay cut. Also, their targets should be focused on net income and operating cash flow. We suggest that the regular employees should take the smallest pay cut, if even taking a pay cut at all. However, you may need to make some personnel decisions and fire your least productive or least valuable employee.
Get the Opinions from a Cross-Section of Interested Parties
Could you use more ideas for cost containment?
Consider gathering data from several interested parties. Talk to a wide variety of your customers, employees, vendors, and peer groups. What suggestions do they have for cutting costs? What do they see that you are not seeing? Put a survey together to assist you in identifying your weaknesses, as well as your strengths.
We’ve found it helpful to gather a committee to come up with cost reductions. Committee members can be extremely excited to help when you split a percentage of the 1st year savings (10 percent to 20 percent) with them.
Cut the Fat
One of Dave’s first work experiences in the financial industry was as an intern and an assistant to a few financial advisors. He saw on a daily basis how owners got annoyed by the little expenses. Whether it was the type of copy paper or printing double sided or other ways to use resources, there are ways to cut down costs. For meritorious reason, these little expenses add up quickly.
These sorts of expenses can be remarkably simple to fix and should be the kind of ideas that your committee will discuss. For example, what kind of computer paper or printer ink are you using? Do you use recycled paper with minimal brightness? Do you use recycled ink cartridges and get re-fills from vendors who offer a cheaper product than the printer company?
Do you own or lease your equipment? Over the course of one year, it may make sense to buy refurbished equipment from a re-seller rather than lease. Go through benefit-cost and break-even analysis for all items that you are leasing and if the break-even is less than 18 months, we suggest buying the re-furbished equipment rather than lease.
A small business owner in Bellevue, Wash., is a great example of someone who could cut the fat in the day-to-day operations. He used to consume hundreds of reams of paper for proposals and analysis. After speaking with many of his customers, he found they let the reports collect dust on the shelf. He decided to change one commonly-used report from more than 100 pages to fewer than eight pages. Sure, there was a lot of excellent information in those 100 pages, but rarely anyone read through the dictionary-sized reports.
Additionally, unless it was for a high-end customer, he switched to recycled paper instead of glossy paper. These acts saved hundreds or maybe thousands of dollars over time.
Consider doing an inventory of management and employees. What is your manager to employee ratio? Identify which managers have less than five employees under them. Consolidate the units or find another unit for them to join. Mangers need to have responsibilities that spread the cost of their salary and utilize their skills in a meaningful way.
Additionally, take time to think about the auxiliary benefits that employees or vendors receive that are not necessary? For example, you may be providing free sodas or coffee or free lunches on Fridays for your company. Eliminate these auxiliary benefits, at least for the short-term, and see how it helps your bottom line over the next year. Most employees would probably rather have that money in their pockets than receive the free benefits.
How do reimbursements work at your company? Make sure all marketing reimbursements are pre-approved 30 days ahead of time and that structured limits exist for these expenses. If the employee exceeds the limits, that individual is responsible for the expenses out of their pocket.
Also, if the employee is on contract and will be receiving 1099 income from business generated from marketing events, consider having them put skin in the game by splitting the expenses according to their commission split.
If possible, look to vendors to pay for part of your marketing or some of the auxiliary benefits.
Consider Raising Prices
As our business has grown, we’ve made the decision that we cannot be all things to all people, but all things to some people. We have solid sales, but from time-to-time profit margins are weak.
If you are in this same situation, let’s consider raising prices. Yes, this will certainly drive away some customers, but some of these are probably your headache customers and you and your staff will be glad to be finished with them.
This can be one of your hardest decisions and is not always possible, but it can often lead to higher margins and less stress.
Give it a try – first give the prices a little bump of 5 percent and if that is successful try increasing prices another 5 percent down the road. Do not be too aggressive, but in most cases this proves to be hugely successful. You will probably be surprised at the number of customers you will maintain.
The hardest part will be applying this change and then sticking to it. It will be particularly tempting to keep prices low for many customers and not to apply it to all customers – this will often lead you to run into the same issues you had before. Do not do it! You will be stretching yourself too thin.
Advisory services through Capital Advisory Group Advisory Services LLC and securities through United Planners Financial Services of America, a Limited Partnership. Member FINRA and SIPC. The Capital Advisory Group Advisory Services, LLC (CAG) and United Planners Financial Services are not affiliated.
The views expressed are those of the presenter and may not reflect the views of United Planners Financial Services. Material discussed is meant to provide general information and it is not to be construed as specific investment, tax, or legal advice. Individual needs vary & require consideration of your unique objectives & financial situation.
"Neither United Planners nor its financial professionals render legal or tax advice. Please consult with your accountant or tax advisor for specific guidance."