Why the Boss Needs to Put Profits FirstGeorge Cloutier
Editor's note: This is the tenth in a series of case studies about business turnarounds. The name and identifying details of the company used as the example have been changed. Problem: No Plan, No ProfitsLetterheads Inc., an office stationery printer and distributor located just outside Savannah, Ga., should be making a 10% profit margin every year. It has a solid customer base despite the recession, and it's been able to negotiate some great price deals from paper and ink suppliers because of the recession. Those vendors have been offering the owner deep discounts because they're anxious to retain one of their few steady customers. Sounds like a recipe for a healthy inflow of cash, right? Wrong! Sales have been consistent at $6 million a year, but the business is losing money by the fistful. Every year, overhead in each department has been creeping up, and the second-generation owner, a bright and dedicated woman named Alice, just can't seem to keep track of all the cash that's bleeding out of the business. She doesn't drill down into the expense reports like she should. She doesn't require all checks over $500 to be approved by her. The cost of running her company—from her employees' salaries to petty cash for stamps—is out of control, but she has no idea why. She just assumes it's necessary. Like so many small business owners, her approach has been to compensate for the rising business costs by focusing on sales. But no matter how many new clients she brings in, she can't seem to get ahead. She tells herself she'll make up for it in the next quarter. She blames the economy, her bank, and everything and everyone but herself. She's ignoring the fact that she has serious profit leaks, and she's not looking hard enough to find their source. It's time for her to end denial and take a good look under the hood. Solution: Implement an Ironclad Fiscal and Operational Plan!Business owners always like to say they have a real plan, but few actually do. When they bother to map out some sort of strategy, it's usually in their heads, or written on the back of a napkin that's long since disappeared. And these plans don't do what they need to anyway—put profits first. And if you don't have a strong and evolving plan for profits, you will fail. Most companies estimate sales, usually too optimistically, then go department by department to figure out the cost of those sales before arriving at the bottom number—the profit. Profits become the leftovers from sales. They come last. But we advocate putting profits first. Small business owners must look at what their profit margin should be based on a realistic estimate of sales and bank that money at the beginning of the financial year. Every year, Letterheads should set aside $600,000. That is the profit that goes to the house, and it is not to be touched. The remaining $5.4 million is the money Alice has left over to operate her business, and she absolutely cannot spend more. She needs to let her employees know that their department budget must be airtight. Department heads who go over it will be held accountable, and those who manage to save money will be rewarded. Like the family that sets a $1,000 monthly budget for their expenses, compromises and sacrifices will have to be made. Alice will also have to change her ways. There's no room for fuzzy math or self-deluding assumptions in a plan that puts profits first. She needs to keep a close watch on all the cash that's going out. Already, she's found some cash leaks in her purchasing department, which has been habitually over-ordering the most expensive paper stock, even as demand for the fanciest stationary has been dropping. As the year goes on, we are confident that Alice, with a clear profit goal in mind, will find more ways to save on costs and even exceed her 10% profit margin. Her offices are too big. Staff and supplies could easily manage with a third less space. If she negotiates with her landlord and relocates to a smaller space in the industrial park where Letterheads is based, she'll be able to shave at least $35,000 off her operating costs. With such a plan in place, business owners have no excuse for failure, because the financial and operational goals of your business are all laid out by the numbers at the beginning of the year. Employees have their marching orders written in black and white, which you can refer them to from time to time. It's all about discipline. Hold yourself and your staff accountable for profits and adjust costs daily. Cut ruthlessly to earn, and prosper. Trust me, you'll learn to live without when you see that healthy bank statement at the end of the year.