business

Denial About Financials Leads to Failure

Editor's note: This is the 12th 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: Denial Is Leading to Disaster A private-label ice cream manufacturer on the Texas Riviera—Lucky Licks—had a solid few years of sales, but its profits are rapidly melting away. The $5 million business is no Ben & Jerry's, and the owners, a married couple named Jack and Jessie, are cash broke. When the couple started the business more than 10 years ago it was their dream to sell a homemade product they loved and believed in. That enthusiastic approach is a good start for any company, but it has nothing to do with whether a business fails or succeeds. That's a mistake thousands of business owners make: They think having a passion or a dream is the only recipe for success. But they're missing key ingredients, like financial controls and a disciplined plan for profit. Because Lucky Licks' product is good, sales are good. The husband-and-wife team are meticulous when it comes to quality control. They take pride in what they do every step of the way, from using the finest ingredients to making sure the product is fresh. Although their top-line sales are in the millions, they are still losing money. Why? Because they didn't want to face the day-to-day financial realities that go into making a profit. Whenever Jack takes orders from new accounts, the customers offer a price they are willing to pay and he accepts, regardless of his costs. Jack has no idea what his pricing should be per batch. There's just no logic to it. He doesn't even write down the price of his ingredients, or the man-hours it takes to produce each order. He makes all his pricing decisions by the seat of his pants. There's also a lot of waste. They recently decided to try an exotic flavor without a test run to see how it would sell. It bombed, and they were stuck with 200 gallons of "Lucky Lychee" gelato that just went bad. Compounding the pricing problem is the fact that Jack and Jessie demand only the finest ingredients for their 24 ice cream flavors—like "Persimmon Cinnamon" and "Macadamia Nut Crunch"—and they pay top dollar for them. Just as Jack refuses to haggle with new accounts, there's no price negotiation with suppliers. Even when they do get the pricing right, it takes them months to collect on receivables. They should add "Cash Crunch" to their ever-growing list of flavors. Solution: Worry More About Financials, Less About Fudge Toppings It was obvious from the moment we started working with this duo that they were more interested in the peripherals of running the business and the perks of being business owners than making a profit. Our first meeting with Jack and Jessie was on their boat. That said it all. Jack is more obsessed with how clean his cruiser is than the details of the very business that is supposed to be paying for its docking fees. Jack is more of a gunslinger than a disciplined manager. We had a string of suggestions for ways this couple could save their business, starting with their balance sheet. But as we talked numbers, we could see the pair's eyes glazing over. It was easy to see where savings could be made. We got on the phone with their main dairy supplier and after some tough negotiating we got them to lower their price by 10%—not a tremendous amount, but over the cost of one year it would add up to close to $65,000. Not a bad savings for two hours of work. Lucky Licks had a handful of small retail outlets to help create some demand for their product in the larger stores. The flagship outlet would run out of flavors on a daily basis, and customers were being turned away. This situation prompted the owners to run up extra batches of inventory to make sure their ice cream stands were always stocked. Instead, we recommended raising the price. Even if they lost 5% of their customers due to the higher price, they'd still make a higher profit. We tried to explain that if you're selling gourmet ice cream, people expect to pay more. They have to realize the product is exceptional and if you want the best you must be willing to pay for it. Since the store was in an affluent neighborhood we didn't see any problem with this. We gave it a trial run and in the first week profits were up by 130%. We also advised them to put an end to the "Do It Yourself" Sundae offered in the stores. Customers were making lavish use of sprinkles and whipped cream, and it was killing the profit on each item sold. These were easy calls to make. But when business owners are in deep denial, they just don't see it. They don't want to face the truth and do the hard work that needs to be done to turn the business around. In fact, Lucky Licks should have been less concerned with their own little ice cream boutiques and more focused on broadening their distribution to supermarkets and delis, where the real money is to be made. Jack and Jessie only sold their products to stores within a 100-mile radius. They could have tripled sales if they'd bothered to get in their car and extend their footprint to a few more counties. But they balked at the idea. It would have meant less time hanging out on their boat. Ultimately we decided to go our separate ways. The owners were too resistant to change. They didn't want to do the hard work of saving their business. We couldn't make any of our advice stick. We'd just be taking money from a client hell-bent on ignoring our advice, and we didn't want to stand by and watch them destroy what they'd built. It was obvious they wanted to make some slight changes and expected the results to be satisfactory. But "close" only counts in horseshoes and hand grenades. All the advice and resources business owners have at their disposal to get themselves back on track are meaningless if they don't have the will to do it. I wish I could say Lucky Licks survived their own financial mismanagement. They made a tasty "Raspberry Ripple," and now I can't find it anywhere on the Texas shore. More case studies are available in our ongoing series.

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