May 24, 2024

You’re the Boss: How I Finally Turned a Profit

Staying Alive

Careful readers of my post on whether to buy a building might have noticed that my business reported a profit in 2010. Yup, it was right there on my 1120S: the company reported earnings of $92,155 on sales of $1,516,837. Which is a little bit of an accomplishment, considering all the years of losses and the terrible first quarter we experienced last year. I’ve been asked to provide some more information about this, specifically, what I did to turn things around.

Before I get into that, I want to reassure all of you that I understand that my years of cumulative losses far exceed this one small profit. I still have a large list of challenges that I’ll be addressing sooner and later, and I know that I’m still woefully ignorant in many ways, despite the best efforts of helpful commenters to beat some sense into me. So fear not, those of you who enjoy following my struggles. There are plenty more to come.

Back to the profit. I can think of six main reasons we ended up with more money at the end of the year than we had at the beginning:

1. I cut payroll costs brutally in the fall of 2008 and continued to shed workers as demand plummeted the following year.

This was very difficult. The meeting where I told half my workers they would be laid off, with no severance pay, was horrible. Cutting everyone else’s wages by 20 percent was just as bad. I had to do two more layoffs in 2009 to keep our production in balance with falling sales. The money we saved kept us from closing the doors.

2. I rolled the dice with my kids college fund and invested in marketing.

By early 2009, it was apparent that demand for our product had not entirely disappeared, but that our existing marketing wasn’t efficient enough to keep us going. I grabbed the only cash I could lay my hands on and went for it. Our revamped Web site does a much better job of connecting with prospective clients. We sold just enough to stay alive in 2009, and by spring of 2010 I couldn’t keep up with the incoming calls. Another critical investment was taking one of my best cabinetmakers off the floor and moving him into the office to learn sales. This was expensive in the short term. I lost his production capacity, which was significant, and it took him a while to get the hang of customer interactions. But now he’s a steady producer, and between the two of us, we can keep up with incoming calls.

3. I learned to monitor my cash situation so that I could take appropriate action when I was running out of money.

On the last Saturday in October, 2008, I sat down to figure out exactly when I was going to run out of money. After messing around in QuickBooks for a while, I gave up and wrote an Excel spreadsheet that takes into account future income and expenses in a way that allows me to test different payment scenarios. No accounting package that I know of allows for easy switching of the date associated with payments. My spreadsheet is a little too usear-unfriendly to post here, but it has turned into an extremely useful tool for managing my cash flow.

4. The economy turned around in 2010. I repeat, the economy turned around in 2010. Once more: the economy turned around in 2010.

Items 1-3 were important but nothing beats a steadily increasing stream of paying customers to inject some adrenaline into a sagging business.

5. I got rid of debt and cut costs wherever I could.

By mid 2009, I had finished paying off the vendors we owed money from 2008. This decreased cash demands by more than $10,000 a month. Several equipment leases ended in 2010, freeing up another $3,500 a month. I renewed my lease in 2010 at a 15 percent discount, saving another $2,500 a month. I switched insurance carriers and saved a few more thousand. We turned the heat and air conditioning off in the office and kept the shop floor temperatures further from the comfort zone than we ever had, which saved a few thousand more. And The Partner took a big haircut on money the company owed him when he left, saving another $3,800 a month. The decreased debt payments account for most of the year’s profit and made our cash flow positive for the last three quarters of the year.

6. As demand increased, I invested in efficiency instead of just hiring employees.

By that I mean, I bought better tools first, improved operations second and hired only when absolutely necessary. There are great deals on used machinery out there. And even the most hidebound craftsmen are willing to rethink their ways when the alternative is unemployment. When I did add staff, I was able to get great people at a discount from pre-2008 wages. Our productivity has increased significantly, and our new cost structure allows for a decent profit margin at the level of sales we are seeing this year.

Of course, I know that the smart things I did the last few years should have been done long ago. If I had been running the company in 2005 the way I am now, we would have had a big cash cushion on hand when the downturn started. I’ve learned hard lessons. But there’s no doubt that I have a new set of problems ahead as I try to manage a resurgence.

Would anyone like to predict what my next mistake will be?

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

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