SURVIVE

Overview

The company is a small manufacturing entity in business for nearly 26 years. The founder had been able to grow revenue
consistently over many years by building a reputation for quality products, moving into multiple markets and acquiring
several larger customers generating several million dollars of revenue per year. However, due to a lack of understandings
about the company’s true operating dynamics certain middle managers had continually made critical errors in managing
its manufacturing processes. As a result, the balance sheet had already seriously deteriorated when approximately 35% of
the company’s revenue was suddenly lost.

Challenge

Although operating for many years, the company had only produced breakeven results or at best very thin profits of 1% or
less. Despite success in growing revenues over the years the company was never able to make progress in increasing the
bottom line. In recent years significant inventory increases were disproportionate to sales, profit margins were falling
and covenants in the company’s loan agreements had been broken culminating in the company’s first loss in its long
history. The company’s bank was very concerned about the condition and direction of the business and was on the verge
of calling the $3.2 million loans. The founder was forced to inject an additional $467K of cash to keep the company
operating. The company was in serious danger of going out of business after 24 years. The Profit Experts were
recommended by the company’s bankers to help in turning the company around.

Solution

The first step was to complete a diagnostic review of the company’s operations to determine where the greatest potential
existed for profit leaks. The review revealed four operating areas with a very high risk of leaks and six areas with a
moderate to high risk. Within these areas there were a total of 35 specific functions with critical exposure. The Profit
Experts tool also provided clear priorities for addressing each issue in the proper sequence.

Regular weekly sessions were established to analyze these specific areas of the company’s operations with key individuals
in the company including the founder, middle managers, production supervisors, sales staff and accounting personnel.
These sessions were used to identify and develop the appropriate management tools and systems required for providing
the critical information and simultaneously training management on the financial dynamics of the company.

The newly developed tools were used to confirm the true profitability of each area in the company’s operations. This
information was instrumental in facilitating changes in the company’s inventory management, production processes and
the founder’s sales strategy.

The Profit Experts’ standard tools were employed to provide a map to improved profitability and sustained cash flow with
an ability to test decisions before they were implemented to ensure success. Profitability targets were established and
tracked monthly to maintain focus and to direct management’s efforts more effectively.

Results

Equipped with this new financial intelligence the company saw a dramatic turnaround in a very short time. After the
initial (nearly fatal) revenue loss of approximately 35% management was able to “engineer” an additional 7.6% reduction
of unprofitable revenue while entering new, higher margin niche markets. Counter intuitive changes in the operating
environment specifically identified by the reviews and tracking mentioned above have driven unproductive activities from
the production process and significantly improved operating margins. The founder was also able to make adjustments in
the company’s general & administrative cost structure to more closely reflect the new revenue levels and focus the
remaining resources more effectively.

The overall impact of these efforts has resulted in a transformation that saw the company’s revenue drop from $9.2
million to $8.5 million and its profit swing from a $440K loss to a record profit of $572K (greater than $1 million) in one
year. EBITDA margins have improved from 7% to 13+% in the same period. The company is currently on track for its
second record year in a row.