Case Study

I recently took on an interim role at a medium sized business after the Financial Controller resigned. They had been operating for 10 months. The business was funded by Owner’s Equity contributions and a large inventory loan with a 12-month interest free period. The Owners had rented substantial premises which was excessive for their current needs but considered necessary to cover future growth. They secured the services of experienced sales and operations teams, and the early signs were positive. They made losses for the first 8 months but had turned a small profit in months 9 and 10.

The first-year budget was prepared on what they thought they could achieve – there was no historical information to go on – and the first 10 months of trading was not too far off budget. The longer-term budgets assumed a steady growth in turnover and profits each year.

Turnover and gross margin was down in month 11 and they made a big loss. The Owners were not overly concerned, thinking this was a blip and they would get back to budget soon enough. 

I had some serious concerns around the size of the overhead, particularly the payroll, rent and looming interest repayments. Cashflow was severely affected and required an injection of funds from the Owners and an extension of the inventory loan terms. I took a close analytical look at the numbers and prepared various budgets based on what-if scenarios. A complication was the product mix. It was a perfect example of the 80/20 rule. That is, 80% of their gross profit came from a very high value product line, but 80% of the time was spent on servicing 20% on the product lines which only contributed to 20% of the gross profit. 

We sat down with the department managers and looked at best- and worst-case scenarios. It was soon evident that any downturn in the signature product line (which happened in months 11 and 12) would result in substantial losses. The size of the overhead, needed to support the other 80% of the products and services, was unstainable. 

Given the timely intervention and interrogation of the numbers, the Owners made informed decisions regarding the future of the business and took immediate action. Whilst this resulted in downsizing the business and getting rid of staff, it led to higher profits. Had they not taken these early decisions, the business would have folded, and everyone would have lost their job.

My role in this was not to tell the Owners how to run their business but to analyse the numbers, bring issues to their attention and to act as a sounding board and run numbers based on their thoughts and ideas. Even though it resulted in my assignment ending prematurely, my real contribution to the business was spotting the red flags early. Continuing as they were for a few more months would have cost them hundreds of thousands of dollars and probably resulted in them closing the business.