Turnaround Tenacity
I met my new business hero just last week. His name is Leslie Childress and he hails from the hard scrabble hills of Eastern Kentucky. Maybe they breed folks a bit tougher down there but this guy has shown me a tenacity and resolve that I have rarely witnessed in my work with distressed businesses.
Leslie and his lovely wife Tina have lost it all three different times. They have been flat broke, deep in debt and jobless but have scratched their way back every time. As Tina tells it; “I’d be on the couch crying convinced that we could never recover and Les would be on the phone trying to line up Plan B” (…or C, or D…). Almost every business problem is fixable but it is too often the owner’s lack of determination that creates shattered families, unemployment and a weakened economy.
As an example, only two months ago I worked with another client who was quickly killing his $8 Million service business. Bob had a well established business in the tony suburbs of Chicago’s Northshore but one look at his balance sheet told me that he would be out of business by year’s end. On day three I detailed a plan for Bob to turn his $450,000 loss in 2008 into a $100,000 gain in 2009 with some pretty simple moves. (I love when clients leave all the low-hanging fruit for me).
But, Bob didn’t want to make changes. “You’ll be out of business in a year – don’t you think that will be a significant change?”, I asked. A deer-in-the-headlights gaze was all I received from him that day. Here was a guy who inherited the business from his father-in-law and was left with strict instructions not to change anything. I countered that liquidation might be outside the spirit of those instructions. As shock therapy I even offered to buy the business on the spot (for 10-times 2009 earnings) if he refused to make these changes. But, by week’s end, Bob was willing to take small, tentative steps towards change.
Leslie and Tina don’t need any coaching towards survival. They’ll make the necessary moves and have proven their commitment time and time again. But, tenacity alone will not save their fortunes. They have some real issues which may keep them from ever enjoying long-term stability in their business.
Unfortunately, Leslie and Tina’s key deficiencies are more universal than we care to admit. Following is a quick list of risky shortcomings that I find common in many small businesses today:
1. No Accounting System. Actually, Les and Tina had one but it was dangerously inaccurate. I asked them to unplug it for the time being because the numbers were simply absurd.
2. Minimal Accounting Knowledge. Les and Tina are smart and savvy but are not comfortable reading an Income Statement or a Balance Sheet. Unfortunately, many entrepreneurs aren’t quite comfortable reading these statements either. And most have done “just fine” without them. Just as most recreational pilots have done “just fine” without instrumentation – until they fly into a storm. Folks, this economy is a storm and proper knowledge cannot be undervalued.
3. No Budget or Cash Forecast. Will you make money this year? Will you be able to make payroll 10 weeks from now? Any answer similar to; “I don’t know” or “I think so” should set off alarm bells. You are captain of the ship and everyone is counting on you. People don’t fly on planes where the Captain leaves their safety to chance – why would they work for one who does? Both budgets and cashflow forecasts are simple to implement and should be one of your most powerful management tools.
4. Family Business. It’s a great strength most times but can leave you exposed. Leslie needed a high-paid consultant to address his wife’s bookkeeping. A handshake agreement between family members left him high-and-dry several years ago. A trusted Uncle stole from them last year. The right family members will walk through fire for you but the wrong ones can leave you burned along the way.
5. Lack of Education and Training. Do you know what you don’t know? Smart business leaders do. Lack of greater knowledge can be a liability in family run companies. Unless leaders have accumulated several years of work experience in professionally run corporations or have earned an MBA, they may not know what a well run organization looks like. A parochial definition of success can create an even more insidiously narrow understanding of proper management. Remember Bob from Chicago? His father-in-Law taught him everything about the business.
6. Sloppy Pricing. Leslie applied the same pricing structure to every customer. From his very largest commercial customer to direct retail sales. If you are Costco – fine, this model may work. But for anyone else, you are only shortchanging yourself and your employees.
7. Dependence on Inventory. Leslie sees inventory as a sign of wealth. Probably because he didn’t have enough in past years. These days he is pridefully accumulating. I tell my clients that everyone loves inventory. Everybody. Your vendors love it because it made them rich, your employees love it because it makes their job easier and your customers love it because they get instant satisfaction. And it only costs you money! If it takes 1 week for you to get new product in, why would you possibly carry more than 2-3 weeks of inventory? Trust me, there is no good answer to this simple question.
8. Credit. Leslie and Tina are way too savvy to have extended credit. And on the few times where they have and were burned, they took legal action. Bob, on the other hand, had a couple hundred thousand dollars of dead receivables. Like most business owners, he only called when his own cash was tight and had no systematic way of collecting on a daily basis.
So what happened with Leslie and Tina? Within two days we identified ways to cut inventory 20%, pull 8% out of labor, capture 5% of revenue that was slipping through the cracks and increase prices 10% through better marketing and positioning. Now we’re hard at work delivering these savings to the bottom line and giving Les and Tina the tools and training needed to sustain these gains well into the future. And with Leslie, I have no doubt that he’ll be a top student.
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Jeff Sands is a Director with Dorset Partners LLC, (www.DorsetPartners.com), an advisory firm specializing in corporate turnarounds, financial restructuring, revenue revitalization and profit improvements. The team at Dorset Partners has guided hundreds of business turnarounds in dozens of industries over the past 35 years. Much of this knowledge is outlined in the recently published Turnaround Roadmap™ which is available as a Free download on their website.
