Staying Alive

The struggles of a business trying to survive.

A year ago I wrote a series of posts that dissected my company’s finances and culminated with a detailed accounting of how much money I made in 2011 — $246,626, generated from revenue of $2,155,193. The event that prompted the analysis, writing an application for college financial aid, just happened again this weekend. So I’m going to give you an update on how 2012 went and whether I was able to match what was by far my most rewarding year.

For those who have not read my posts regularly, let me start with a little context. Manufacturing custom furniture is not known as an lucrative profession, and it isn’t. To give you some idea of what I’m talking about, let’s take a look at how my company performed from 2003 to 2012 (I don’t have great records from before then). Sales for that period totaled $16,352,367. The profits? The total for that period is negative.

The vast majority of those losses happened in the years leading up to the crash in 2008 when The Partner and I were doing a very bad job of trying to grow the company. From 2003 to 2008, our losses totaled $1,086,648. The Partner ate much of that when he left the business. The remaining partners — my father, my brother, and me — are owed a large amount of money by the company: $526,754.

Since 2009, I have managed to stop the bleeding, and the company has made profits totaling $401,935. That still leaves an accumulated loss of $684,713. But I have managed, during some very rocky years, to pay my bills. First and foremost, all of the employees who have worked for me got paid, on time and in full. All of the taxes were paid, on time and in full. All of the vendors, and my landlord, were paid in full (not necessarily on time). While the company owes my partners and me a pretty good pile of cheddar, it owes nobody else.

Between 2003 and 2010, my annual salary averaged $78,484, and I loaned, on average, $29,363 of that back to the company (after I had paid taxes on it). That left me an average of $49,121 a year, and I have the lifestyle to match. Aside from a house in a decent neighborhood, my wife and I live modestly.

My 2011 windfall came right on time. My oldest son was supposed to start college in the fall of 2012, and my wife, in preparation for the empty-nest experience, had started a two-year graduate school program. She would need the Master’s in order to get a job teaching. So, 2012 promised some large tuition bills — hence my relief at the outstanding financial results of 2011.

I had no money saved for college. There had been a small amount set aside, but I took that in 2009 and spent it on a new Web site. The big bump in 2011 income allowed me to set aside enough cash to cover both of the tuition bills, which was a good thing, because, as it turned out, that income also disqualified us from receiving any financial aid. I would need more than $80,000 for education.

A boss is supposed to be a competent financial manager, considering the ebbs and flows of money within the company and making financial decisions for the stakeholders with perfect objectivity. My own experience has been that the needs of my family and my own fears for the future have a powerful influence on decisions I make about the company’s money. As a small-business owner, there is little boundary between my company’s financial health and my own. I have, on multiple occasions, signed personal guarantees for company expenditures. In order to get company credit cards, in order to establish a line of credit (since closed), and in order to lease my space, I have been required to pledge my assets. If the situation gets out of control, everything I own is at risk.

Last year started well. I decided that rather than wait to see how much money I would have at the end of 2012, I would pay myself a reasonable salary, which would ensure that I would have enough money for the following year’s tuition. But sales started to slump after two months, and I ended up stopping my salary in April. I did continue to pay interest on the loans I had made to the company, but my pay shrank from $15,000 a month to $3,225 a month. This took me from a position of adding to my savings every month to draining them. In May, the wheel of fortune turned again. Both of my cars (a 1999 Odyssey and a 1993 Camry wagon) died in one weekend: blown head gasket and bad transmission. Meanwhile, sales continued to slump, to the point where I wondered whether I would have to lay off workers.

By the end of June, sales were dropping by 50 percent every month, and our order backlog was shrinking fast. I had run through two thirds of the working capital I had on hand at the beginning of the year, and we were down to a week’s worth of cash. I hadn’t seen a paycheck in two months. As it turned out, the problem was a mistake I made in my AdWords campaign. (I wrote a series about how I figured this out last fall). Part of the solution, aside from rejiggering the campaign, was to hire an expensive sales consultant to maximize the effectiveness of our salespeople.

My personal situation had evolved as well. My son decided to take a gap year instead of starting school. He is a talented programmer, and he was able to find a full-time job in San Francisco and support himself. So now I had another year to worry about his tuition. (He’ll be starting his studies at M.I.T. in September.) My wife suffered an injury to her rotator cuff, which was very slow to heal. So she ended up postponing her second year of graduate school. That freed up enough money to replace the two cars.

Over the summer, the company’s sales came back from the dead, revived by both the training that the salesmen had received and the repaired AdWords campaign. Over the course of the fall and into the last quarter, our working capital crept back to where it had been at the beginning of the year. But I did not restore my salary. I wanted to make sure that we could show at least a small profit and to start 2013 with a decent amount of working capital.

In the end, the company was able to show a profit of $27,530 on revenue of $2,077,770. My share of that, as owner of 40 percent of the company stock, is $11,812. My salary for the year was $66,090. And the company paid interest on the debt it owes to me totaling $35,484. That all adds up to $113,386. Not terrible, I suppose, and certainly nothing to complain about. Many, many people get by with a lot less. But a rather large drop from the previous year. I was just glad that it wasn’t worse.

So, what is the moral of this story? I think it’s that, especially for the owner of a small business, nothing is certain. What do you think?

Paul Downs founded Paul Downs Cabinetmakers in 1986. It is based outside Philadelphia.

Article source: http://boss.blogs.nytimes.com/2013/02/20/what-i-took-home-in-2012/?partner=rss&emc=rss