Learning How to Turn Promise into Profit
Joe is the CEO of a growing IT consultant firm that provide network management solutions as well as selling and repairing computer equipment out of a retail store. He has two silent partners in the business who lent him some money to get it going.
Joe learned how to save his business and please his investors with CPA’s help.
Joe had grown his team to 25 people. He thought things were going really well and told his friends and colleagues how he had doubled his revenue in just two years.
But he had a problem, however. After the financial year end, Joe sat down with his CPA, who delivered the brutal truth. Yes, sales had doubled, but profit had shrunk – in fact, virtually disappeared. And not surprisingly, Joe’s consultant business was quickly heading for a cash crunch. And now, his two silent shareholders were upset that he could not pay them their annual dividend.
He had fallen into the classic trap of expanding too quickly, offering long credit terms to acquire new business and generally stretching himself too thinly. His CPA showed him that if he carried on in the same way, he would be out of cash in three months.
Joe had recently attended a seminar put on by his accountant on profit and cash improvement for small business. At the time he had not followed up as he had so much on his plate. But now he knew he had to make some changes. So he asked his accountant for help.
Finding A Way Back To Profit
Together, they came up with a plan. They started by setting aside half a day to put together a high-level operating and financial plan for the business. Some of the action items from the plan included:
- Increasing prices by 10% – Joe discovered he could lose almost 30% of his customers without affecting his bottom line and didn’t believe the attrition rate would be that high, so he figured he would be ahead
- Reducing credit terms – Joe’s accountant pointed out that it was taking his customers 78 days on average to pay him. By reducing this to just 50 days, he could free up enough cash to stay alive for another three months – enough time to implement the changes required to turn the business around
- Reducing headcount – unfortunately some of Joe’s team members were extremely unproductive so they had to go
- Understanding the numbers to enable Joe to make better management decisions – Joe’s accountant now acts as the business’s Virtual Management Accountant, reconciling the transactions, analysing the numbers and preparing actual vs budget reports within 7 days of the month end at a formal board meeting
- Accountability – the accountant also works with Joe to agree on just one project to implement to improve the numbers each month and then holds Joe accountable at the monthly meeting.
Twelve months into the project, revenue is steady but profit is now back to where it was, alleviating the business’s cash flow problems.
Whatever your financial and accounting needs are, Williams & Kunkel can help you. Call us today in Flower Mound at 972-446-1040 to have a chat.
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Source: Panalitix