THE CLIENT:
This client is a custom woodworking company whose primary business was serving retail shoe companies making display racks for shoes in their stores. They had three main customers in a self-imposed 350-mile radius. While the customers had locations outside that radius, for ease of control, the client stayed within that geographical area.
Because of geographical saturation, the three main customers were not opening new stores at the same rate as they had been previously, and the wood working company was required to rely on remodeled stores which had much lower sales values and lower margins.
THE SITUATION:
Upon arrival, profit was negative and there were four major issues causing a drain on the profit:
Declining sales – The business was experiencing sales that were half of what they had been in their best years, and the combined expenses were causing the owner to continually transfer money from another business into this one to keep it afloat.
High levels of raw inventory – To take advantage of truck load quantity discounts, the customer had bought standard wood stock in excess of the current demand. A significant amount of cash was tied up in this raw stock and, of course, they still had to purchase other materials as the inventory they had was not always the material they needed.
Underutilized high dollar equipment. – They had recently purchased a very high dollar computerized CNC machine capable of extremely intricate work that could significantly reduce scrap, but the machine was only being used part of the day. The main work was being done on saws and other less technical equipment.
No working capital – Additionally, the business had no working capital as the cash reserves were nonexistent and they were working check to check for everything including payroll, taxes, paying suppliers etc. It was a daily issue to determine who got paid and how much, and they had maxed out their line of credit.
THE SOLUTIONS:
The only way to save this business was to strategically plan and look at it holistically to make significant improvements in multiple areas simultaneously in the three main areas of Sales (Get Business), Operations (Do Business) and Finance (Account for the Business)
1) SALES
Instilling Business Innovation
More revenue was desperately needed, but when the head of sales was asked how they obtained new sales, he replied, “that is really hard.” Since ideas and innovation can come from anywhere in an organization, we introduced a formal weekly meeting of the key managers that included, the President, Directors of Operations, Sales, and Finance. This was not a meeting to solve the myriad of daily issues, it was a once a week opportunity for the managers to act as business leaders. They had 39 other hours in the week to solve daily issues, but for one hour a week, they became the Board of Directors and elevated the discussion to those topics that would help the business grow, flourish and become profitable.
Paradigm Shift
At one of these sessions it became obvious that a paradigm had to change. To that point, everyone in the company thought of the business as one who made displays for shoe retailers. Over the course of a few weeks they came to realize that they were highly sophisticated designers and builders of custom wood products who happened to have been making displays. When they realized the market for that specific commodity was in decline, they started looking at additional ways to sell their capabilities.
Not long after this paradigm shift, they went after, and received, a large order for cabinetry for doctors’ offices. They also received an order for a very high-level bank requiring some high-end furniture. Soon after, different types of custom wood working were being sold to new customers with higher margins.
2) OPERATIONS
Implementing Measurement
In the operations area nothing was being measured and the shop was an absolute mess with little housekeeping going on. On our very first day, I took the Director of Operations out and we determined that there was a physical point in the shop such that when an item reached this point, it was considered ‘Complete’. That day we began to collect data of every item that passed that designated point of debarkation to, at least, start the discipline of measuring activities, and we declared that the shop would start being cleaned up at the end of the day.
Assigning Cost / Applying Labor Effectiveness
After a few days, the Director of Operations found a way to place a dollar value to the work being completed on a daily basis. Now we had, at least, a barometer of how much value was being produced. That matriculated into being able, on a very rough scale, to measure labor effectiveness (efficiency). We found that daily tracking was too granular to use for any decision making, but in a few weeks, trends started yielding some very valuable and actionable information leading to being able to determine how much labor was going to be required in subsequent weeks. Prior to this, every employee came to work every week and they were paid for forty hours, even though they were not needed and did not add value for their effort.
3) FINANCE
Organizing Chart of Accounts
While Operations measures were being developed and refined, a thorough review of the financial statements uncovered something very interesting. The company’s accounting charts of accounts were not conducive for ease of review and to make decisions from. The charts of accounts were reorganized to have true costs fall where they should. For example, initially all salaries were categorized under ‘Indirect expenses.’ These were realigned whereby shop ‘Direct labor’ went to ‘Cost of Goods Sold’ or COGS. Sales salaries and commissions went into a new accounting bucket for ‘Sales Expenses’ along with other sales activities such as travel, entertainment, marketing etc. Finally, Indirect expenses were properly coded.
Once complete the Income Statements accurately reflected revenues, COGS, sales expenses and G&A. The business could now see where the money was coming from and where it was going and how much was being spent on different activities.
Detailed Financial Tracking
Once the Chart of accounts was reorganized, we took reporting one step further and started tracking financial activity by customer. Not surprisingly, one of the “best” customers was causing a loss. The new data allowed sales to approach the customer and get a significant price increase. Had they not, the decision was made to stop doing business with that customer.
Detailed Budget Targets
With the financial statements being resolved a detailed budget for the next year was developed. A rough budget was developed line by line, and the different managers came in and worked on their part of the budget. The result was that, for the first time in the company’s existence, they had targets to shoot for on a monthly basis to ensure the company would be profitable. Throughout the year, the budget was compared to actual performance on a monthly basis.
Cash Management / Forecast
Last, a Cash Management model was introduced that expanded out over twelve weeks. This tool was updated each Monday and provided them with the visibility to see when issues were going to arise, allowing them to plan for and act well ahead of the issue. It is Cash, not Receivables, that allow a business to run on a daily basis.
THE RESULTS:
In less than six months, the company became cash positive and the following year their sales grew exceedingly from their previous highs. Because they had metrics in place to review labor and other expenses, profitability doubled as a percent of revenue and the company was more successful than ever before.
Also, at the beginning of this process, the President, who was the father of the Director of Operations, had a very strained relationship; however, by the end of the process, their relationship became strong once again.
Many of the activities seem obvious, but businesses can grow fast and in non-linear ways, to a point at which its systems and processes become ad hoc. Eventually, they are forced to start dealing with the issues in front of them.
The effort to undertake the changes above took a significant amount of time and effort. In many cases, small business owners are not equipped with the skills and knowledge to know how to put similar practices in place.
Also, the psychological impact in many cases is as difficult as the physical changes. Developing and reviewing metrics and holding people accountable is difficult for some, and especially tough for family members. The key is to not become aggressive or defensive about a metric, but to look at it as a data point to help you find and improve an issue.
It is the business and the livelihoods of several families that are at stake and focusing energies on improving the business becomes a much easier task. It is far more fun to work in a successful enterprise than one that it is in trouble.
At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:
