Turnaround Case Study

A dire situation for a longtime business owner meant we needed to act fast

A retail business owner came to me for help turning around their store. They had been open for two decades but things had taken a downward turn over several years. They had a decrease in cash flow and mounting vendor payables, resulting in increasing credit card debt and the need to borrow money from the family. Things were starting to look desperate.

We took a hard look at the numbers and analyzed the situation

The first thing was to look at the balance sheet and P/L statement. These are the “scorecard” of the business and have valuable information regarding the company’s performance, the assets and liabilities, and the profitability of the store. After viewing these documents, I was able to pinpoint a number of trouble spots immediately.

Sales were stagnant and had not grown over the previous two years
The gross profit margin of the store was significantly lower than the rest of the industry
Operating expenses were increasing despite the flat sales
There was no tracking of sales within product categories so it was impossible to know through the P/L where sales revenue was actually being generated
Working capital (current assets/current liabilities) was a sobering 1:1.2 Banks consider 2:1 healthy
The family loan had increased to $80,000, jeopardizing retirement funds and relationships

The downhill slide was speeding up

As I looked more closely, I saw that the trend was getting worse. With each month the debt was increasing and the sales weren't keeping pace. The situation was unsustainable. Something had to be done to save the business and the family investment.

Gross profit margins were declining since much of the inventory had to be placed on sale to move it at retail
Inventory purchases were random. There was no knowing what each product category was selling relative to the total sales
Payroll was much too high as a percent of sales revenue
Sales revenue and gross profit were not adequate to pay the operating expenses while making principal payments on the family loan

The solution was small but important changes

After reviewing all the data, we created three prong plan to target cash flow, inventory and debt management.

We needed to keep track of the cash flow

For cash flow we created a monthly cash flow sheet to monitor and control all cash in and out of the store. By monitoring this regularly, we could tell if and when changes needed to be made.

We needed some significant changes to inventory management

For the inventory issues, we started with taking inventory by product category. An analysis showed that 88% of the sales were being generated by only 7 categories. The other 12% of the sales were being generated by 11 product categories.

Then we delved deeper into those 7 categories to find that apparel represented 49% of the sales revenue but was only 28% of the total inventory. We were missing sales due to inventory in apparel turning too rapidly.

We adjusted the percentage of inventory in each of the top 7 categories to match the percentage of sales in that category. As a result, sales increased, apparel expanded to 75% of the store, and the gross margin increased from 41% to 55%.

But that wasn’t all. We also developed an Open-to-Buy inventory purchasing system to align total inventory with the annual Cost of Goods Sold and forecasted the ideal number of annual turns. This created a tool to ensure excess money was not being put into inventory and that there was ample supply to meet the sales forecast.

We needed to restructure debt to save on interest payments

To manage the debt, we secured a line of credit at 5% to pay down credit cards at 18%+ saving thousands of dollars per year in interest payments. Extra cash could be used to pay down the family debt instead of on credit card interest. And with increased sales, the payroll percentages fell in line with industry averages so there was no need to cut hours for the employees, which increased job satisfaction and security.

The turnaround started almost immediately

The move from “what are we going to do?” to doing what needed to be done wasn’t that far. A few simple changes and keeping on top of the numbers allowed this retail store to step away from the precipice and step firmly into the black.

I love a happy ending!

It was exciting to see progress after just a few months of implementing these changes. Each small step in the process brought incremental increases to profitability.

After three years with this strategy and control system in place,

The family debt was paid down to $30,000
Cash in the bank had increased
Bills were being paid on time
Inventory was being properly managed
Credit cards were paid in full, thus no interest expense
Gross profits increased
Working capital increased to 2.1:1, making this retail store a healthy, vibrant business