Every Man for Himself – A Case Study

Just as companies have multiple products to provide diversification to their revenue stream, some parent organizations have multiple companies that sell products that are counter cyclic to assure that if one business has a difficult year or season, others may have a better year, and be able to support the corporation overall. The decision as to whether to stay "in the family" or spread in other directions is a philosophical one.  

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But the larger issue may come down to how those companies operate under the corporate umbrella. Do they work independently, or do they work together for the company’s greater benefit? This can provide a bigger challenge when companies become more vertically integrated. It simplifies the supply chain and provides strength and pricing security up-stream. But challenges arise when the pricing of the sister company is not as competitive as others in the marketplace. 

• Business – Temporary Staffing Company with multiple divisions
• Location – Chicago, Illinois
• Sales – $87 million
• Ownership – Single owner

Initial Contact –

The business owner was a very successful serial entrepreneur. He had built his family of companies over many years and used the profits to live a rather lavish lifestyle. Every new idea generated a new company under the overall umbrella. Some of them were vertically integrated, and each was led by a strong, independent division Vice President. As a result of the amount of cash the owner had taken out of the business, the balance sheet was weak, and the bank suggested some cash flow control and profitability analysis. They brought us in to help guide the company financially.

Significant Findings and Recommendations

Division Profitability

The company had a janitorial division that provided cleaning services for hotels and restaurants. They purchased a lot of cleaning chemicals. Another division sold cleaning supplies to janitorial companies. But they never did business with each other. The janitorial and chemical company Vice Presidents were so driven by their own profit motives that they refused to discount their prices or pay more for their supplies. The result was that cash was flowing out of the company into the pockets of their competitors.

Recommendations

• Establish a separate pricing category for in-house reselling. This would provide some discounted pricing to the sister company while restricting that pricing to in-house sales only. Pricing could be set at a middle ground so that both companies share in the “cost” of doing business with each other.
• Bonus structure for the two division Vice Presidents should be adjusted so that selling in-house on a cooperative basis provides a benefit, not a penalty to them. The issue is that any money spent in-house stays in-house, money spent outside sends cash, profits and volume outside the company. 
• The president of the company needs to provide direction to the division Vice Presidents that they need to work together for the benefit of the company overall. 

Cash Flow

Cash availability had become an issue over the years. Most of the company’s clients were large corporations who clearly had the money to pay their bills, but were always running late. The company was short on cash, and the AR totals were growing, as over 60-day and over 90-day balances rose. There was nobody in the accounting department looking at collections, and the owner didn’t want to pay for additional staff.

Recommendations

• Hire a "collector" to call on past due invoices. One important issue was how to approach the calls. Long term customers needed to be cared for, large companies needed regular ongoing contact. Someone who had the responsibility to provide follow up would have a great impact. Result – Hired a full-time employee to make phone calls on collections. In less than 6 weeks, she collected more than $2 million of the $3 million that was over 90 days past due. 
• Provide a discount for prompt payment. The cost of not having cash available was restricting growth of the company, and forcing additional use of the credit line. Providing a discount could be less expensive than paying interest to the bank, and stretching the credit line to its max.
• At a time when the economy is in a state of flux, it is prudent to review the payment terms and credit lines for clients. Just because a credit line is established, doesn’t mean that it’s cast in stone. Credit policy is based on risk. Adjust the available credit based not only on payment experience with your customers, but based on the general economic risk to your business overall. If the economy is shrinking, changing your credit policy to protect the company may be a prudent decision.

As management makes decisions to grow their companies, they may either stay in their area of expertise, or delve into new areas. But another approach is to go vertical. Stay in an area where you have expertise and expand within the supply chain. Controlling costs and delivery is an important part of any company’s plan for success. But it’s up to senior management to keep their eye on overall company profitability and the factors that contribute. If a company doesn’t buy internally, that cash goes out the door.

It’s a two-way street. Is the reason the products aren’t cost competitive the result of greed on the part of the supplier, or a failure of their supply chain to cost effectively source their products? Not being price competitive everywhere in their supply chain might be the cause of other issues, such as increasing competition in the marketplace, or falling sales. It’s the responsibility of the president of the company to keep an eye on inter-departmental competition. When individual division leaders hold their ground to protect their own bonuses, then profitability of the overall company might be the victim in the long run.

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