Our client was a company who truly prided itself on its closely‐held family culture. The owner believed in maintaining a 9:00am to 4:00pm work schedule and giving all employees a 12% raise each year in order to maintain employee retenCon and morale. When the client came to Wharton SBDC, the client stated that, “I have begun to recognize that the way I am behaving is going to ruin the business, which would ruin me, as the business is my career and livelihood.” “I take care of everyone else’s needs ﬁrst – my clients’ as well as my employees’ ‐‐ and those needs are insaBable, so I rarely get around to what is good for the business.” For the client, it was important to ﬁgure out a way to increase proﬁtability in order to keep the company in operaCon.
AMer iniCally looking at the client’s ﬁnancials it was clear that revenue was relaCvely ﬂat year over year and that proﬁtability was quickly declining. The client came to the Wharton SBDC with a desire to increase proﬁts not only just because they were concerned about the ability to meet payroll moving forward but also in hopes of reaching a point where they could sell the company in a few years.
The consultants discovered the source of the client’s rapidly declining proﬁts was due to the company’s spiraling expenses. With revenue remaining stagnant and expenses nearly quadrupling year over year, it was evident that the client’s increasingly climbing costs were eaCng away at proﬁtability.
• Changes in Expenses • 2004: ↓$43K • 2005: ↑$21K • 2006*: ↑$79K
The consultants realized the issue they had to tackle was an issue of proﬁtability and there were two ways they could tackle the problem.
Profitability Problem Increase Sales with Current Employees and Payroll • Create a better marketing strategy for new customer acquisition • Price more appropriately • Target more profitable customers
• Change mix of employees • Downsize • Exchange salary for subcontracting
• Change mix of output • Replace custom sales with syndication sales • This will call for downsizing
• Limit 12% yearly raises • Increase employee hours or productivity (i.e., decrease hourly wage)
The ﬁrst issue the consultants explored was the client’s proﬁtability by client. It was noted that their smaller customers were not proﬁtable and conversely their proﬁtability was Ced to a few, large accounts. The consultants deduced that the client needed to come up with a markeCng plan that focused on acquiring larger, more proﬁtable accounts especially since the company had not acquired any new large accounts in the past three years.
In addiCon, there was the issue of employee compensaCon. As stated earlier, the entrepreneur gave every employee a 12% yearly raise, resulCng in salary rates above industry standards. In addiCon, due to the work culture the entrepreneur had created, at peak Cmes of the year the company would in turn have to hire seasonal workers which added to the company’s expenses. For a ﬁrm that was generaCng ﬁve Cmes less revenue than the average ﬁrm in the industry, their payroll should not have been more than twice the naConal average’s payroll as a percentage of revenue.
Payroll as % of Rev.
Source: 2002 Economic Census
For this client who expressed thoughts of selling the business in the future it was extremely important to increase the company’s proﬁtability so that the desired (higher) price upon exit could be achieved. AMer extensive research, interviews, and ﬁnancial analysis, the consultants concluded that in order to operate successfully, the clients costs must be structured in a way that mirrors their revenue growth. In order to do this, the following changes were recommended: – Reallocate/reorganize employees to beYer match customer proﬁtability with employee costs – More frequent mid‐project project checks versus target should occur to ensure that proper pricing esCmates are going forward – No projects below $5000 will be accepted – Restructure salary and bonus scales to include both tenure and merit‐based compensaCon (AEer interviewing the company’s employees, in contrast to the entrepreneur’s assumpBon, employees stated they would not leave if they did not receive the yearly 12% raise or worked 8 hour days.) – Broaden the company’s customer base and reduce the company’s dependency on one large client • Redesign and re‐launch the company’s website • Create new promoConal materials (collateral), as well as business proposal presentaCon materials • AYend business presentaCon and negoCaCon websites • AcCvely encourage higher‐level managers to become more involved with selling and the new customer interface