In this case the business was seen to be very successful and had won a business award in the last 12 months.
And, the business was successful, having a healthy turnover. But the reality was, it wasn't making a profit - in fact it was making a loss.
The owner knew that something was wrong as he had cash flow problems and was struggling to pay his bills on time.
The problem was that although he knew something was wrong, he didn't know what - and he had waited for 4 months for his financials from his accountant. And this was 11 months after year end. Most likely, the conditions that created the loss in the first case had continued for another 11 months. So the most likely scenario for the current year was a repeat of the prior year, although due to the cash flow problems experienced by the business, some expense cuts had been made. At this point, we don't know what the interim result will be.
So what was the cause of the situation? A substantial loss due to expenses increasing at a greater rate that revenue and gross profit. A large portion of this loss was due to increased wages paid to the owners.
A number of austerity and tax planning measures will need to be put in place in the short term to stabilise the business until its true position can be established. However, what really needs to happen is for strategies to be put in place to grow revenue and profits, incorporating realistic financial projections based on simple, monitorable key performance indicators. Further, owners wages will need to be matched with profits, after allowing for recoupment of prior years losses.In other words, put the owners in control so that strategy and financial management is consistent with the obvious operational excellence that the business conveys to its customers and general public - the reason why it won its business award!
I'm looking forward to the challenge!
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