How to Grow While Maintaining Margins

How to grow while maintaining margins_HFA blog image

Submitted by Taylor Ganz, Profitability Consulting Group

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

Our Preparation

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

What We Found

When we arrived, we met an owner most employees loved but had allowed the business to grow without structure, processes, or controls. Two stores were generating $17 million in revenues, but the company was losing $500,000 – $600,000 a year and burning through cash at an alarming rate. Margins were 7-8 points below where they needed to be to achieve profitability as the salespeople were allowed to give away the store to save every sale. Discounting was rampant, and salespeople were free to cut Protection pricing, waive Delivery charges and offer long-term interest-free financing whenever they deemed necessary. The salespeople were making a fortune, as were the suppliers, and the customers were crowing about the great deals they were getting. Payroll and headcounts had skyrocketed as ownership kept throwing bodies at the problem. They were only still solvent because the family owned the business real estate. To make matters even 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 view our role as “keep businesses in business, “not facilitating a GOB sale.

Our Solutions

  • We sequenced our holistic approach to the problem, focusing on operational, organizational, financial, sales training, and merchandising issues.
  • Reviewed our plan with their local banker and persuaded him to lend on the one uncollateralized building they owned, with the loan proceeds earmarked to pay off the hard money loan and provide some short-term working capital.
  • Raised margins by 8-10%, knowing that this would potentially hurt volume in the short run, but it was necessary to save the business in the long run.
  • They created a new commission program that paid each salesperson on the final realized net margin of the sale after deducting merchandise and financing costs and adding revenue from Protection and Delivery. The salespeople could still give away the store but wouldn’t get paid for the sale if they did. Guess what? : they stopped almost immediately.
  • Re-structured and right-sized the organization to cost-effectively support what we estimated to be the new sales base. Put in a wage freeze and reduced specific salaries that had escalated yearly for 10-20 years. Guess how many of those affected by the wage reductions left for other jobs? No one. We also identified disruptive employees who were working to undermine our initiatives and against the company’s betterment. With ownership approval, we had them terminated from the organization, including one family member we banned from entering the premises.
  • Once we had stabilized the financial situation, we turned our Sales Management, Sales Training, Design Theory and In-Home Selling team loose. The programs we instituted gave the Sales Force new skills, confidence, and credibility. They now emphasized value, not just price, and further increased margins, close rates, and average tickets, as did our Merchandising programs and processes.
  • We revamped the Customer Service department and practices to resolve what had been an onslaught of customer complaints.
  • We have instituted weekly structured Management Meetings and enhanced communication and leadership skills.
  • The PCG team members made multiple follow-up visits over several months to ensure that implementation had become institutionalized and a permanent part of the organizational processes, practices, and culture.

The Results

  • Sales initially decreased by 20%, as we anticipated. Still, within 3-4 months, the increased margins reduced overhead, and the payoff of the hard money loan had restored the company to a cash flow neutral/favorable position.
  • In the first full year following our involvement, the company achieved profits of over $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 the owners can take extended vacations without constantly worrying about the business.

Sometimes bigger is better, but not always.

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