One Man’s Journey – The Profit Struggle

by Dan Lacy - December 15th, 2010

Last week John called and wanted me to help him develop a 12 month forecast (profit and loss, balance sheet and cash flow) that his bank was demanding from him. John was a God fearing man, worked over 70 hours a week managing his company and the 30 employees that worked for him. His company had not made a profit last year (doesn’t anybody read the papers, it is tough out there) and yes cash was tight; but he was still in business, making his payments on time, meeting the needs of his customers and making payroll.

John said that since late last fall, his banker has been very concerned about his company’s ability to make a profit by year end and now since he hadn’t, his banker was demanding more information on a more frequent basis. John didn’t understand what all of the fuss was about. The company was not profitable and probably wouldn’t be profitable until the economy turn around. John had been through these down turns before and always came outof them, what made this one different?

The story behind the story. What John didn’t realize was his banker had
been reviewing the company’s financial statements for the last 9 months and
it shows that although the company had met payroll, payroll taxes and bank
payments, it was getting further and further behind with its payments to its
vendors. The company lost $400,000 last year and accounts payable had
increased $490,000 in the same period. The vendors had paid for the
$400,000 in losses and also picked up the $90,000 in principal payments the
company had paid down on their term debt.

So why was the banker so concerned about the company’s ability to make
a profit and John wasn’t so concerned.

John had not understood that profitability (one of the key elements of cash
flow) is the grease that keeps the business running. John feels that if he
has enough determination, worked hard enough and is committed to his
business, everything will work out.

John’s banker was more in tune with the financial viability of the company
than John is. This is a bad sign – that your banker knows more about the
internal financial workings of the company than the owner does. The banker
is trained to glean minuet pieces of key information from the financial
data. John doesn’t have the background or experience to understand his
financial data like his banker does.

John was relying more on the past than on the future. John had been through
these down turns before, they always came back and he always made it through
them. Except this time, he is more leveraged than the last down turn and
this time it is taking much longer for the economy to turn around than any
of the previous 20 years John has managed the company.

In this case, the banker was right to point out to John his concern
about the company’s profitability. Here are six (6) reasons why business
owners need to keep their focus on profitability:

Profit is the primary ingredient in cash flow (EBIDTA). It is the “E” in
EBIDTA

Cash flow generated from the business is what pays debt service on term
debt: vehicles, equipment, real estate, etc. Want to be debt free – profit
is the only thing that will get you there.

Profit is what builds equity. Growth in equity is what enables the company
to grow. Revenue growth creates an expansion in assets which forces an
increase in the other side of the balance sheet Liabilities and Equity,
Liabilities expansion has limitations based on that relationship with
Equity. Want to grow your business, equity has to grow and profit is the
biggest contributor to equity.

Profit is one of the primary elements in value. Profit has a 3 to 8 times
multiplier which adds directly to value and is the biggest contributor to a
company’s value. Thinking exiting soon – profit will make you the most take
home money.

Profit builds working capital which enables the company to pay bills in a
timely manner and take discounts

Profit is one of the primary elements that support additional term and
working capital debt. Want to grow your business and need financing,
increase your profits and financing is sure to follow.

Profit aren’t everything, they are the only thing. Profits are
critically important to every business. John won’t be around long if he
doesn’t take the steps he needs to get his company showing a profit. His
vendors are going to clamp down on allowing him purchase materials on
credit. Then the pendulum will swing the other way, COD. No 30, 60 or 90
days to pay, it is pay in advance. That really puts a crimp in cash flow.

Much of what I do with clients revolves around these concepts in some
way. While I have always preached how critical it is to set goals and march
toward them, being a sounding board, confidant, and accountability partner
is just as important. If you need help in any of these areas, please give me
a call or shoot me an email.

To Your Business Success:

Dan Lacy
Growth & Profit Coach, Financial Strategist, Cash Flow Doctor, CEO Mentor
dan@dynastybuilder.com
phone: 765-644-8887

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