A woman with a great talent for baking owned and operated a bakery in suburban Chicago with her father, who also enjoys a successful career in corporate America. Despite the abilities of its owners, the small business suffered from profitability and cash flow problems.
In fact, in 2013, the bakery operated at a $34,000 loss, leading the baker and her father to consider closing their business. After all, the company had been losing money for some time, and the owners just weren’t sure the business model could result in a profit.
It wasn’t until they met with a local small business consultant that they truly understood the potential their company had and what changes they’d need to make to reach it.
Understanding The Business’s True Potential
Working with an accountant who cost the business a lot of money but only processed documents and provided baseline accounting work, the owners were looking for support at a lower cost. They also needed someone who could pinpoint their small business problems and help solve them.
When their new business advisor took over, they asked him point blank: “Does our bakery have the potential to make us money?”
Not only was their new partner certain the small business could make money, but after he looked into the company’s financials and discovered some of its cash flow problems, he predicted that it could generate $30,000 in profit by the next year if the owners made the right changes.
Uncovering The Profitability And Cash Flow Problems
When he studied their financials, the small business consultant discovered two glaring issues that were crippling the bakery’s profitability and cash flow:
- The owners were spending over $30,000 per year on advertising, predominantly on direct mail that offered a buy-one-get-one-free coupon
- The business’s costs were roughly 40% higher than normal for a bakery; something abnormal had to be going on
ADJUSTING THEIR MARKETING DOLLARS
The business used a point-of-sales (POS) system that tracked how many coupons were redeemed for its advertised offer. The owners were spending over $30,000 to promote this deal, but the POS system showed that only $150 worth of coupons were redeemed.
It was clear: Their advertising wasn’t working.
The owners’ advisor recommended putting money into social media and targeting community events instead. These efforts cost the business just $5,000, and the return on their marketing dollars was greatly improved.
What Was The Cause Of Their Drastic Cost Issue?
A normal, healthy cost for goods or ingredients typically ranges between 32% and 35% of revenue. At this bakery, however, cost of goods was 50% of revenue. The owners’ small business advisor thought that operations ran fairly efficiently, so that couldn’t be the source of such a great problem. He had a strong suspicion that the owners were suffering from internal theft, and as it turned out, the owners were already skeptical themselves.
Their consultant connected the owners with security consultants who installed a new POS system that tracked cashiers’ keystrokes and other surveillance.
In a matter of weeks, the owners caught employees who were stealing from the business. Some employees were entering fake transactions and taking cash from the register, while some were stealing inventory.
The business was losing $40,000 in stolen goods and money over the course of the year.
The damage was far greater than either the owners or their consultant imagined.
The Impact Of Their Changes
After uncovering their profitability and cash flow issues, the business went from losing $34,000 in 2013 to operating at a $47,000 profit in 2014.
The $81,000 swing in profitability was not only a clear indication that advertising and shrinkage (theft) costs were at the root of the small business’s problems, but it also proved that the business was more than capable of making the owners money.
The owners and their consultant then began discussing the prospects of opening a second location. The business was now making enough money to hire a manager to run the first location. The baker needed to become comfortable investing in such resources that would free up her time and empower her to run a second location.
As it happened, the perfect location hit the market, and the small business consultant connected the owners with a banker who could provide them a loan and line of credit, as well as a business coach to help build a business plan.
In early 2015, the owners opened the new location. In the first month in business, it generated more sales and profit than the original location ever had in a single month.
The second location only continued to prosper, while the first also grew consistently. After several months of sustained profitability, the owners started working to open a third location.
From profitability and cash flow problems that nearly forced the owners to close their small business to the kind of success they had dreamed about, the daughter and father now have their sights set on franchising their business.