ABC, Inc., is a small California manufacturing company that was buying product in bulk, converting it, and shipping it out to other companies in a typical B to B fashion. To their delight, they grew swiftly. However, their operational challenges had begun to threaten their growth and their very survival. They needed help.
Client Advisory Case Study
This Small Business Had Big Problems
Company’s Growing Pains Resolved with Accounting Support and Guidance
“We knew something wasn’t right, but we didn’t know what it was or how to fix it.”
It seems backward, but it is very often exciting, rapid growth that causes successful new companies to almost fold. Such was the case here.
- ABC Inc.’s products sold well, and revenue increased, but they weren’t sure of their costs or if their prices were too high or too low compared to their competitors. They didn’t have time to check.
- They hired people to handle jobs without having time to vet them or train them.
- Their inventory wasn’t under control.
Every big company was once small.
This firm’s CFO didn’t have any solid accounting background. But that’s not unusual for companies that literally start in their homes. Steve Jobs and Steve Wozniak launched what would become Apple, Inc. from their garage. Spanx owner Sara Blakely started with $5,000 of her own savings and had her mom and friends test her garments. She is now worth $1.1 billion.
When we were called in to help, LSL CPAs was doing ABC, Inc.’s income taxes, but that was all. ABC, Inc. started with five employees and snowballed quickly to twenty workers. Everyone pitched in when they could to help with manufacturing, deliveries, accounting, marketing, sales, and “anything that needed doing.” So, several folks at this wonderfully successful little company were wearing multiple hats. Many employees and managers were friends and family sharing the vision to become the next Apple or Spanx.
What went wrong?
The company’s owners were running as fast as they could but didn’t know what they didn’t know—except that something didn’t feel right. The problems were painfully real but also “invisible” for the managing team. They were so close they couldn’t see them. These four areas were causes and effects of the difficulties:
1) The managers didn’t see eye to eye.
2) Job descriptions overlapped.
3) Inventories weren’t under control. Sometimes too much, or too little, or product inputs were late in arriving, which challenged production output and delivery schedules.
4) Pricing and costing were difficult to pin down.
“ … I wholeheartedly recommend this firm and their expertise to all parties who are interested in receiving high-quality professional service. Thanks to LSL CPAs and Candy Mako and her team, our company is now moving in the right accounting, financial, and operational direction.” -ABC, Inc.
The team at LSL had seen situations like this before and knew how to fix the problems. The first order of business was tightening up the accounting function. In this case, ABC’s original accounting manager was not professionally trained, and the company had already found someone to replace them. Great start. Then, ABC asked LSL to train its accounting department employees in GAAP-approved bookkeeping processes.
The LSL team also found a specific accounting software program for the particular industry and product line; and provided job descriptions to improve the workflow. They installed an inventory control system that helped ABC, Inc. determine their COGS (costs of goods sold), improve inventory turns to make better use of their cash, reduce outages, and enhance service. Rarely before had ABC, Inc. seen or even approached a “Goldilocks,” just-right inventory level where everyone could relax. At this point, they’re still perfecting it, but they are much, much closer.
Better information: LSL suggested using KPIs (here is a recent blog on Key Performance Indicators) to help each person and department know what was being measured and how well they were doing compared to a baseline or against goals in various categories. Management finally could quantify whether and by how much they were improving, and had an organized approach to their business.
Morale has improved. Employees have learned what they are supposed to do and know how to do it. People smile a lot more. The inventory is getting better, and costs are more transparent. The result is that ABC, Inc., can compare their prices to their competitors with confidence, and they have an improved understanding of how profits will be affected by meeting or ignoring their competitors’ offerings in the marketplace.
The company’s principals are getting along. They understand what was wrong, are glad they took steps to fix the problems, and know how to keep their company in a healthy growth mode from now on. They’re still exploring the idea of using LSL’s outsourced accounting solutions if they have another growth spurt, which would be fantastic.