Overview
XYZ Corporation is a marketing firm selling products to retired, middle income, seniors in their homes. XYZ’s Sales Representatives work exclusively for XYZ and receive commissions for their sales. In return, XYZ finds clients or prospective clients for their Sales Reps (at significant cost to XYZ) and set 3 appointment a day for each of their agents through an in-house telemarketing unit.
The President and sole stock holder of XYZ contacted Kim Rich Consulting and indicated that XYZ was virtually bankrupt and since he had personally guaranteed significant corporate debt, he was personally in danger of going under as well. He was seeking a way out.
An initial review of the financials indicated that XYZ had:
- Annual gross revenue of $4.9 million
- Annual net revenue (after sales rep commissions) of $2.9 million
- Monthly average NET loss (EBDTA) of $18-22,000, for each of last six months
- Business Line of Credit was maxed out at $600,000
- Fully mortgaged business property
- An outstanding loan against future commissions of $350,000
- An agreement due within 60 days requiring XYZ to purchase a commercial Condominium for $1.3 million
Process
Since time was clearly of the essence, I agreed to fly out to meet with him within a week and did so. In the meantime I was provided financials for the past three years, sales reports for the past three years and a current organizational chart. In addition I requested and received the LOC agreement, the loan agreement related to future revenue and the condominium purchase agreement. Further, I asked for the current business plan and learned that there was no formal business plan though the overall plan had been to quickly grow a previously successful, though smaller, business model.
Given the poor financial condition of XYZ, it became clear early on that any corrective actions would need to be taken in two stages; first, early and dramatic actions to keep it viable (if appropriate) and second, a set of longer term actions to ensure XYZ’s longer term success. In the first stage the plan was to:
- Determine if the company was worth saving – was there inherent value there.
- Identify the key operational deficiencies and determine if it CAN be saved.
- Determine the corrective actions necessary to stop the financial hemorrhaging as fast as possible.
- Get the actions fully implemented.
Through a series of meetings with key staff members and an appropriately thorough analysis of financial statements, sales reports, staffing numbers and cost analysis of key functions, we discovered the following:
-Until about 18 months previous, the business had been viable, and though not spectacular, had consistently produced about $3.5 million of gross revenue, and was profitable.
-About that time the owner, believing the business model was expandable, put in place a growth plan intended to triple the gross revenue within two years. His reasoning was that since sales was basically a function of finding prospective clients through direct mail, hiring telemarketers and finding agents, the business model could be leveraged significantly, fixed costs as a percentage of revenue would decrease and profit margins would grow considerably.
Analysis and Findings
Within the first five days, the following conclusions were reached:
- All key business metrics had deteriorated in the past 18 months, including the number of appointments telemarketers were averaging a day, the average number of sales made per sales call and the average size of each sale.
- Twelve (24%) of the 49 existing sales agents were producing 71% of the sales revenue and ten of those twelve agents had been with the company over 5 years.
- There were 22 telemarketers currently employed, setting an average of 7 appointments a day, though 5 telemarketers were setting an average of 11.
- The organization had three layers of management and 15 additional support staff.
Actions Taken
- Sales staff was immediately cut to 15, retaining the best producing sales reps and terminating the contracts of all others
- The telemarketing staff was immediately reduced to 5
- The second layer of management was terminated with one exception and responsibilities were re-allocated appropriately.
- The owner of XYZ met with the bank that was building the condominium as an additional floor to their building. Since the real estate market was sound at that time, the bank agreed let XYZ “walk away” from the project.
- A revised business plan was put together showing the actions being taken, financial projections and cash flow projections over the next 18 months. The owner took that plan to the bank holding the LOC and was able to forestall that bank from reducing the LOC (and thus requiring immediate cash) as long as the financial projections were met.
- A comprehensive communication plan – directed at employees – was created and presented to explain what actions were being taken, why, what the expected outcome was and how it impacted them.
Results Achieved
- Annual gross revenue dropped from $4.9 million to $3.5 million
- Within 3 months XYZ was profitable
- Within 6 months, XYZ was averaging a monthly profit of $35,000 and within 15 months of this engagement, the company had produced a profit (EBIDTA) of $650,000 and positive cash flow of over $565,000.
- $1.3 million of debt was immediately removed from the balance sheet and within 20 months the line of credit was paid off.
