What to Do When Profits Stall

Editor's note: This is the latest 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: Borrowing from Peter to Pay Paul

A truck distributor based in the Pacific Northwest is pulling in more than $30 million a year in sales, but the business hasn't shown a profit in almost four years.

The Rocky Mountain Truck Company's owners, Bill and Ted, are brothers who went into business together right after high school. They're hard workers and managed to generate a steady amount of business over the years, but dysfunction in their operations is costing them dearly. There are way too many employees, and they don't have the productivity to show for it. There's also too much inventory stuck on their lot and on their shelves.

Expenses consistently exceed profits. In order to keep the business afloat, Bill and Ted keep borrowing money in every way imaginable, from getting bank loans to asking friends and family for handouts with promises of paying them back with interest. Their intentions are sincere. The brothers aren't even paying themselves a salary, putting all they can back into the business (something we don't recommend). But at the end of each month, the story is the same. They are in the red. Then they have to borrow, borrow, and borrow some more to forestall foreclosure. They keep thinking things will improve if they just sell more in the next quarter, but they never do.

When a major financial institution declared bankruptcy recently, the fear really kicked in. This lender kept funding losses—the same kind of financial mismanagement that these gentlemen have been practicing for years. Bill and Ted turned to their home equity loans and 401(k)s to the tune of $500,000, a desperate move we would never advise. Their backs are against the wall, and they are looking at total financial ruin. So they're turning to us.

Solution: Chop and Trim

These business owners are throwing too much good money after bad. It's a common mistake, especially in family-run businesses where the management is too close to each other and to the situation. Sometimes you need a fresh pair of eyes, some increased "muscle," and emotional distance.

The first step was obvious. Bill and Ted must to cut the payroll 20%. Whatever it takes, and no matter whom it hurts, it has to be done. The owners must decide whom to keep and whom to let go. With their backs to the wall, they'll be forced to recognize who on their staff is the deadweight and who really generates the sales.

We are also stepping in to contact the banks and creditors, to assure them that someone at Rocky Mountain Truck is in control of the cash. Banks don't want to hear sob stories. They just want their money, and they want to know you're getting serious about your financials. Keep an honest and dispassionate dialogue, and maybe, just maybe, they won't pull your line of credit. We're also asking vendors for a 90-day extension on the company's receivables. Creditors would rather see their money eventually than never, and most are agreeing to 60 days. We'll take it.

Boosting Service Traffic

We're also initiating an incentive plan to drive revenue in their service department—a lucrative area of the business. This is when you really get to see who the value employees are and who is just taking up space. They are taking our advice and offering an extra 10% commission to anyone who brings in service traffic that results in a sale. Within the first six weeks, service traffic was up 18% and revenue was up 21%.

In the bleak of winter, when sales are generally lower, we have them at break-even, and it took only two and a half months of serious financial discipline. Already, most of the vendors and their bank are working with us on a weekly basis. The threatening calls have stopped. By the spring, we expect Bill and Ted to start making a profit. It will be the first time in years.

Sometimes you need to get tough with yourself and your business. Strip it down and make the most of what's good. For two brothers who ran a truck distribution company, it made the difference between turning a profit and getting run out of town.

—with Samantha Marshall

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