Financial Problems Of a Business Designing & Selling Ladies Shoes
A £300k turnover business designing and retailing ladies shoe. Selling globally, it was a profitable and cash-positive wholesale operation. However, the odd poor season had taken a disproportionate toll on the business. With support in the form of a grant, the client asked us to advise on the financial implications of expanding into retail.
No cash flow forecastsHitherto running the cash flow principally in her head, the Proprietor was unclear about the financial implications for the business of funding the acquisition and operation of a retail outlet. Not surprising given the multi-currency and seasonal peaks and troughs of her business. One of the most complex cash flow forecasts we have ever had to produce despite the deceptively small size of the business.
Improving marginsGiven the vulnerability of the business, we examined the cash flow dynamics to help the Proprietor further her understanding of the key factors that would improve her situation quickest. We worked on her margins to enhance her pricing strategy. As a result of the changes she then made to both wholesale and (proposed) retail prices, she needed to sell far fewer pairs of shoes each season before she made money. A critical aspect to stabilising the business. The minimum required sales targets for the retail outlet were, in fact, comfortably within her expectations and she went ahead.
Weak financial systemsAn aside in this exercise, but an important point that one is perhaps more likely to encounter where a business is driven by passion rather than hard-nosed commercialism, was the fragility and functionality of the bespoke IT system, that was central to the business, controlling logistics, deliveries, customer relationships and certain financial information. But extracting even the most rudimentary financial reports was near impossible and reflected the lack of priority ascribed to this area. Given the volatility in cash flow month-to-month this represented a huge gamble.
Supplier cost pressuresThere was also increasingly intense pressure from her key offshore sub-contract supplier demanding higher prices which, for any business beholden to such arrangements, is deeply unsettling. The key concern was whether this supplier was experiencing genuine financial distress with the risk they could fail to deliver on their commitments for the coming season. Th alternative was whether, frankly, they were being opportunistic, believing they had great leverage, as sole supplier, that they could ruthlessly exploit. We were able, from our analysis of their supplier’s accounts, show that their demands were more likely based on greed than financial adversity and thus enable claims for significantly higher costs to be rebuffed.
Financial problems – what does this case demonstrate…… Firstly, that tracking the cash flow of any business largely in your head is fraught with risk. The foresight it affords you will be minimal . But, there are an awful lot of entrepreneurs who do this routinely. Try to recognise this trait in yourself. Terrible sleep might be a sign. Also, if you lack confidence in the financials, you become rightly cautious about making step-changes in the development of the business. In this case, albeit with a desperate need to upgrade the financial systems, the expansion into retail appeared entirely viable.
We can offer you…
… a free initial meeting to help us better understand your needs (in confidence and without obligation).
… where relevant, as a first step, a quick initial view to try to clarify your financial situation.