A RELEVANT CASE STUDY

Back from the brink.  How an established firm grew profits from £Nil, to £1.5m per annum – in less than three years – by planning strategically, rather than just tactically

The OMSG Group Non Exec who worked on this case is Franklyn Roberts, Fellow of the Institute of Business Consulting –

“Is it possible to take a zero-profit SME business that is dependent on a vulnerable overdraft facility for working capital - and make it generate surplus cash?

It may be - but it usually takes a fresh strategic vision - and sometimes that is difficult to find when you are the owner of an established business that requires all your attention and energy to keep it working 

We believe that potential clients such as yourselves value enormously an objective and most particularly strategic, appraisal of your business, and then help for you to set it on to a new path towards serious long term net profitability and shareholder value.  Here’s how an up-market furniture manufacturer achieved a complete turnaround in less than three years”

The company - A family-owned manufacturer of up-market sitting room furniture which had been trading for over twenty years, and turning over between £5 and £6m per annum and employing some 90 people. All output was sold into department store networks around the UK

Couch potato - But the business could scarcely achieve at best a modest pre-tax profit annually of say £50k per annum. It relied also on a vulnerable overdraft facility for working capital, and even this had been cut by the bank by 33 per cent, which meant the business was hitting the overdraft limit up to four times per year

No Exit - The owner had hoped to retire well before his 60th birthday - but the prospect was becoming dim as there seemed no way of achieving any kind of exit value in the foreseeable future

Cash flow problems - Facing a markedly strained cash flow situation, there seemed to the owner everything to be gained by approaching a third party for help. Luckily, the owner was referred to the OMSG Non Exec Group who matched the company with team member Franklyn Roberts, a highly experienced executive skilled in leading business turnarounds for family companies

Discussion - In his Non Exec capacity, Franklyn was able to sit down with the owner and conduct an objective analysis of the net profitability and cash flow problems. He pinpointed the following weaknesses -

• The business model was inherently seriously cash negative, with department store customers taking 90 days and often much more to pay their bills
  
  
• Cash flow also suffered further as a result of many Sale or Return and Sale on Consignment arrangements
  
  
• With the business being 100 per cent dependent on the (terminally-declining) department store business model, this significant family business was also in effect in terminal decline

Plan of Action - Having realised the crux of the problem, the Non Exec then identified a number of possible strategic changes. Further sessions with the management team generated validated realistic plans of action to follow. Their plan was encapsulated in a two-page document accompanied by financial modelling exercises and detailed changes in marketing and sales operations for the three-year project period  

Strategy

• An initial re-allocation at least 25 per cent of total production away from the department store network market to direct sales - boosting gross margins on those sales from approx. 15% to approx. 60% 
  
  
• An investment in B2C advertising driving consumers to a new and substantial factory showroom operation and to a new and fully-transacting website
  
  
• All direct sales were agreed to be solely on a payment-with-order basis
  
  
• Plan to move to 75% of sales being through non-Department Store channels within three years and to 100% within five years
  
  
• Finally, the owner and his team had the confidence to implement changes they had known were long overdue

Result - The company achieved its prize: hugely improved net profitability, massive net cash generation and an amazing increase in shareholder value - ie for the owner, the realistic prospect of a cash sum worth between £7.5 and £15m for his retirement, based on the massively-enhanced trade sale value

All concerned were agreed that the on-going support of the Non Exec over the three year period had been key to the successful implementation - and which in this instance delivered to the owner a Return on Investment in our services of approx. 150 times !

Franklyn says - “The key to unlocking performance is to see past the peripheral issues, and identify the reasons behind flagging / non-existent net profitability. Once I had safety-checked the proposed strategy changes, the management team found renewed courage and a belief that their radical plan of action would actually work“

Are you interested to know how an OMSG Group Non Exec could help your business achieve vastly better net profitability, particularly via strategic change ?

At the OMSG Non Exec Group, our team of eight SME specialist Non Execs has accumulated over 320 years of business experience

We will appoint for you a qualified and highly experienced member of our Group to work individually with your company to deliver an absolute minimum of 300 per cent return on your investment in us and our expertise - Guaranteed

Contact us now on 01235 850790 / 07891 332000 - or via wendy.murton@omsg.org.uk to arrange an initial discussion and review - It won’t cost you anything to talk to an expert

More next month, on another key topic of interest for SME business owners, directors and senior managers 

January 2012

©OMSG Non Exec Group Ltd – 2012