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A Business Growth Case Study

Author: Larry Chester

Nearly every business owner I talk to is interested in growing. But sometimes the plans are erratic, spur of the moment, or not fully formed. That doesn’t mean that they won’t work, it’s just more painful that way.

Bringing Value Through CFO Insights

Growth can come from a number of different approaches – new product lines, an acquisition, new channel of distribution. How do you make sure that the right plan is in place, and there’s enough money to do it?

  • Business – Sales, installation, and service of industrial compressed air systems
  • Location – Suburban Chicago
  • Sales − $11,500,000
  • Ownership – Three brothers who rotated management positions regularly in the business

Initial contact-

The company was profitable, but after some moves to expand the business, they were worried about depleting their cash reserves and using up their line of credit with the bank—which would put a halt to further expansion plans.

Significant Findings and Recommendations:

Inventory Control

A plant tour revealed a huge rack with old, rusty, trade-in equipment that they didn’t know how to value or deal with. Additionally, they started importing private label equipment to sell. This was a speculative expansion that required major cash investment. In light of their growing service business, inventory in the parts department was, unfortunately, bursting at the seams.

Recommendations

  • Refurbish the trade-ins, making use of the service techs’ spare time. With a fresh coat of paint and a refurb, they were salable. The company opened an eBay store and turned the trade-in losses into a new profit center.
  • Carefully watch inventory turns and margins of the new line of private labeled equipment to determine if the expansion was worthwhile. (Time will tell).
  • Reduce spare parts inventory to parts that are regularly used—considering that major suppliers had parts depots within a one-day delivery window. A service call today would be finished tomorrow if the parts were ordered as needed, eliminating $200K in inventory!

Business Expansion

The company had acquired a business in a neighboring state. The price was right, the acquisition well-managed, and it earned a quick payback. The decision was made to add another location.

Recommendations

  • Select another city in a neighboring state, allowing easy servicing and management.
  • Be pragmatic, and make sure that the numbers make sense. Don’t get emotionally involved in the purchase.
  • Start from scratch instead of purchasing an overpriced opportunity. Rent a building; relocate a senior manager and senior technician to select and train new hires. This resulted in out-of-pocket savings of $1.2 million and break-even in six months!

Cash Flow

Considering that the company had gone through most of their credit line and prior year’s profits, there were questions about where the cash went. The recent acquisition, inventory in their new private label line, and the increase in parts inventory had cost $850,000.

Recommendations

  • Conduct a cash flow analysis to verify how much money was spent and where it went.
  • Develop a 13-week cash flow forecast to identify the needs of the company in the coming months, eliminating surprises.
  • Sweep excess cash back to the credit line daily, reducing interest and increasing availability.
  • Create a GL account on the balance sheet for Customer Deposits. Leaving those deposits in AR artificially reduced the AR balance and obscured expected cash receipts.

Financial Reporting

Since data drives decisions in any business, the accuracy and presentation of information can eliminate misunderstandings about the company’s financial position.

Recommendations

  • Review financial statements as a team, so the management team can be assured that they all understand the status of the company and where improvements are needed.
  • Establish accruals—especially for labor—so expenses and revenues are better aligned, assuring accurate profitability reporting.
  • Create inventory reserves to offset the value of slow-moving or obsolete items.

Even well-run, profitable companies can find ways to improve. Every company has dark corners where troubled items have been placed. Out of sight, out of mind. Accurate reporting ensures that everyone is on the same page so that agreement is more easily reached on the best next step forward.

Since everything that happens in a company flows down to the financials, an experienced CFO can provide clarity not only through financial reporting but into operations that directly impact the bottom line.

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