A real small business case by Tom Crouser
You could say Mark and Samantha Middleton worked themselves right into the middle. Some would say in the middle of the country. Some would say in the middle of nowhere. But everyone would say right into the middle of trouble. Both were highly respected and highly paid in their individual fields, he as a computer engineer and she as a biochemist. Their life lacked only one thing – time. With the forthcoming birth of their son, time was more important than ever to the young couple so they bought a small business. Good move. The appeal wasn’t the business itself, rather the location in serene Ascent, Montana, population 4,554. The location and the promises contained in an online classified which said this deal was perfect for anyone wanting to become “their own boss” while enjoying the serene atmosphere. Hum. Well, they recovered their time alright over the last eight years. Now they need money again. Following is their story.
This case study was first published in 2003 and is based upon a combination of consulting assignments among real businesses. Identities are concealed and the issues limited to illustrate and simplify. As such, any similarity to any one business or person is coincidental.
In each of the eight years in business, Mark and Samantha dipped into their respective 401(k)’s to rescue the business from insolvency. But they felt it was worth it. It allowed their son, born a year after arriving in big sky country, to grow up in Ascent was awe inspiring. The shock part came when they realized their portfolios had tanked, their business wasn’t making money and the tyke began picking up a local accent.
Now they worried about his education. They need to be worried about more than that. When we visited them, the business was “big hat, no cattle” – that’s big sky accounting talk for a really bad current ratio (0.3:1 or 30 cents of current assets for every $1 of current liabilities) as well as only 8 days’ cash on hand. Most troubling was that rarely ever have I measured a real 0.3:1 current ratio just like most doctors have never measured a 130 degree temperature because the patient is usually dead before then. So, was this business still alive? And if so, how was it?
Yes. The business was alive, but only because they kept throwing it a life line of cash each year. Fact is they measured their progress by the fact they have put less money in each year. So, without Mark and Samantha’s socialism, the business would have died a good old capitalistic death. However, with the strategic money pipeline from their dwindling 401(k) to the business, the business can live as long as the retirement fund does.
That’s bad enough. But there is more.
Mark’s answer to the cash bleeding was to buy something that would distract him from the obvious need for a selling effort and buy they did: from computers to office equipment. Only the latest and costliest would do. Mark read in trade magazines how one company found a market niche and was saved by a gizmo. So he bought one just like it. A trade association peer him how they found their salvation in buying another gizmo so he bought one of those also. But after the excitement of installing the new equipment wore off and the awareness of the silence in the cash register grew louder; they decided that maybe buying their way to prosperity wasn’t the answer and put a call in to our office.
As we listened to the story of “how they got where they are today,” a pattern emerged; a pattern of owners with unlimited funds who wanted something sociable to do while they raised their child. Unfortunately this expensive game cost them an average of $70,000 a year for eight years.
As the onsite progressed, the potential increased that the business could be salvaged with determination. Even more promising, it became thinkable that the unnecessary debt from the unnecessary equipment, which was the biggest burden on the company, could possibly be managed.
While no one can make debt disappear, we were able to forge a scenario in which refinancing of existing debt could occur ONCE a valid and cash positive budget was developed. Once there was a real plan to profits, and a commitment to stop collecting equipment; then it made sense to elongate some of the debt; lessening pressure on cash (current ratio); reducing short-term the amount of cash going out monthly; and helping to repair the biggest problem of all – the lack of a current ratio. And the planned get well date was also extremely promising – calculated at less than 24 months.
The second day planning session, a budget and action plan was drawn up – including an internal people plan and a selling plan for the battleground. That’s pretty straight forward for most companies, but not with this one.
In this case, they couldn’t even get to the details of a budget and the action plan without an awakening. Mark and Samantha had to be awakened to the fact that something was wrong and they had to be willing to do something about it. They needed to be told that it’s not all about tomorrow – and that putting less money in the business this year compared to last is not progress. They need to know that the business spin off cash, not cost them cash. They need to know that it’s estimated only 35% of small businesses that are for sale actually ever sell. They need to be awakened to the fact that it’s all about performance, not promises.
Once the awakening occurs, the rest is straight forwarded.
“Are you ready to run this business for real?” Mark didn’t like that. He thought he was running it “for real.” He wasn’t. We got passed that and into what “for real” means. In short, it means making all the decisions required to make the budget balance. Mark and Samantha came to agreement on spending, people, prices and debt. With the urging of Samantha, Mark agreed to stick to the budget, organize around functions and to make sales calls. All three of these steps were huge for Mark.
And, like magic, Mark committed to really meeting the budget. No, really. He really committed to meeting the real budget. It came as an epiphany. He finally had a plan. He knew if he just did what he agreed to do, then they would finally be on their way. “I can really do this!” he said as his eyes lit up, “you can’t believe what kind of weight has been taken off me.”
So, where are Mark and Samantha today? Well, they are following the plan set out at the original onsite. You could say they were on the ascent in Ascent, Montana so to speak. They joined one of our performance groups of businesses. Today, their current ratio is up – not perfect but it’s progressed greatly in their first six months. Most importantly, they understand that you have to have a goal in order to ever achieve it. And that’s the awakening which is the most important step in the road to recovery.
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Tom Crouser is Principal of Crouser & Associates, Inc., Charleston, West Virginia. Contact him by messaging firstname.lastname@example.org or calling his cell at 304/541-3714. We’re always glad to provide no cost or obligation initial assessments to businesses facing difficulties.