Did you make more money immediately after the downturn? I meet and work with a lot of business owners. One of my favorite meetings from 2010 was the owner of a business that was making more money after the recession with half its revenue. In 2010, I met the owner of a small manufacturer/distributor that made its own parts and sold them alongside the parts of many other manufacturers to a fairly loyal set of customers.
The owner began the discussion by saying that sales were his number one priority for that year. He wanted to sell in a different way. Prior to the downturn in 2008 they were a $15 million business, meaning they sold $15 million worth of parts they made or bought and then sold to customers. As we were meeting, they were a $7.5 million business. Half the size they used to be and twice as profitable! Clearly, he said, we were doing something wrong in the approach we were using before the downturn.
The pressure of the downturn had caused them to scrutinize every penny and they had simply stopped spending some of them. “How had this happened? How did we get so ‘dumb’ and allow costs to rise so much?” He wanted to know.
There are a lot of contributing factors to this sort of situation and I can’t give a single silver bullet, which cured all their problems. Essentially, this kind of situation arises when a business begins focusing on closing the sale without doing the planning or calculation that needs to go with the sale. Essentially asking a few key questions like; “Can we afford 1,000 orders at this price?” “Does this order require specialized equipment that we will never use again?” “Does this order require us to take on inventory of products we will find difficult to sell again?” “If we win this customer/client what will it cost us to support/service them in the future?”
Over time, because they were compensating their sales force on sales or revenue alone, they had focused on the top line alone without examining the unit costs of this approach to their business. Gradually, as they got bigger, it seemed like they should add staff and functions and the business payroll grew along with the revenue. This compounded the problem of deteriorating order margins by increasing overhead costs, eventually bleeding off half of their profits.
Through the downturn, they took a hard look at overhead costs and solved those issues. When we met, they needed to focus on unit margins and a sales strategy that got unit margins where they needed to be and walked away from bad business they could not afford to take.
My next few posts will be on improving EBITDA and increasing business value so stick around if this is your thing.