How to grow while maintaining margins

When John Egger founded our company, he called it the “Profitability Consulting Group” (PCG) for a reason. While we believe and preach sustainable sales growth, growth without earnings and positive cash flow can be disastrous for your profit margins. And this is what we found when we received a call from a potential client.

Our Preparation

As is our practice, we began the engagement by reviewing the 25-page questionnaire that we asked the client to complete to the best of their ability. We also review current and prior year financials and key merchandise and inventory reports. Our protocol is to learn as much as possible about a client’s operation prior to our initial visit to the site.

what we found

When we arrived, we met an owner who loved most of the employees but had allowed the business to grow without structure, processes, or controls. Two stores generated $17 million in revenue, but the company was losing between $500,000 and $600,000 a year and wasting cash at an alarming rate. Margins were 7 or 8 points below what they needed to be to be profitable, as salespeople were allowed to give away the store to save each sale. Discounts were rampant, and sellers were free to lower Protection prices, waive Delivery charges, and offer long-term, interest-free financing whenever they deemed it necessary. The vendors were making a fortune, as were the vendors, and customers were bragging about the great deals they were getting. Payroll and the number of employees had skyrocketed as the owners kept throwing bodies at the problem. They only remained solvent because the family owned the real estate in the business. To make matters worse, they had recently taken out a hard-money loan to stay afloat, which, in our experience, is almost always a prelude to bankruptcy. At PCG, we see our role as “keeping companies in business,” not facilitating a GOB sale.

Our solutions

  • We sequence our holistic approach to the problem, focusing on operational, organizational, financial, sales training, and marketing issues.
  • He reviewed our plan with his local banker and convinced him to lend on the only unsecured building they owned, with the loan proceeds going to pay off the hard money loan and provide some short-term working capital.
  • I increased margins by 8-10%, knowing this could hurt volume in the short term, but was necessary to save the business in the long term.
  • They created a new commission program that paid each salesperson on the final net realized margin of the sale after deducting merchandise and financing costs and adding Protection and Delivery revenue. Vendors could still give away the store, but if they did, they would not be paid for the sale. Guess what? : They stopped almost immediately.
  • Restructured and resized the organization to profitably support what we estimated would be the new sales base. Freeze wages and reduce specific wages that had increased annually for 10 to 20 years. Guess how many of those affected by pay cuts left for other jobs? No one. We also identified disruptive employees who were working to undermine our initiatives and against the improvement of the company. With the approval of the property, we fired them from the organization, including a family member who was prohibited from entering the premises.
  • Once we stabilize the financial situation, we release our Sales Management, Sales Training, Design Theory and Home Sales team. The programs we instituted gave the Sales Force new skills, confidence and credibility. They’ve now emphasized value, not just price, and have further increased margins, close rates, and average tickets, as well as our merchandising programs and processes.
  • We revamped the Customer Service department and practices to resolve what had been an avalanche of customer complaints.
  • We have instituted weekly structured Management Meetings and improved communication and leadership skills.
  • PCG team members conducted multiple follow-up visits over several months to ensure that the implementation was institutionalized and became a permanent part of the organization’s processes, practices, and culture.

The results

  • Sales initially decreased by 20%, as we anticipated. Still, within 3-4 months, higher margins reduced overhead, and the payoff of the hard money loan had restored the company to a neutral/favorable cash flow position.
  • In the first full year after our involvement, the company achieved profits of more than $600,000; the owners were delighted and credited PCG with saving the company and helping make a significant difference in their lives.
  • Today, revenues and profits are setting company records and owners can take extended vacations without constantly worrying about business.

Sometimes bigger is better, but not always.

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