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Case Study: A Plan To Fail

Posted on May 20th, 2017

Jack Kern
Owner, President
Outsourced Accounting Department, Inc.

In my last article, “Heading off Business Failure,” I referenced an article from Entrepreneur Magazine that listed seven tips to head off business failure. The seventh tip on the list was to “Watch your time as closely as you do your money.”

Related to the above tip, here is another article, also from Entrepreneur Magazine, that I and probably most other small business owners can relate to in one way or another: “The 80/20 Rule of Time Management: Stop Wasting Your Time.” In this article, the author points out various ways we as small business owners can waste our time doing menial tasks that could easily be outsourced to someone at a much lower wage. And by doing so, it frees up the business owner’s time to focus on more profitable business activities.

Another financial term I would use to describe what the author is talking about is “opportunity cost.” This concept basically asks the question, “By focusing my time and effort on these tasks, what is the cost in terms of lost revenues I could otherwise be producing?  For example, in terms of the services our firm provides, what else could my client be doing in their own business that could bring in more than enough revenues to justify outsourcing their bookkeeping? (“Why Outsource Your Bookkeeping?”).

But here is a major example of an opportunity cost that I experienced with a former employer. The owner of the business was an engineering-type with a unique niche in a high-tech product, with several end-user applications in both the military and private sectors. The company had built up a strong sales backlog of lucrative contracts with several customers and had a promising future.

Along the way, the owner decided to take on a major contract with a defense contractor that amounted to a research and development (R&D) job, which produced very little in billable revenues in its early stages (and that his competitors had rejected). Then in order to demonstrate his expertise to this customer, he rearranged his entire production pipeline, pushing out more profitable jobs in the process and creating a cash flow problem for the company, ultimately causing it to become past due with its suppliers.

After several months of this, one day I presented the owner an analysis which indicated that over 80% of the company’s labor costs were producing only 1% of its gross profit.  However, in his mind he was paving the way for a lot of future business with this defense contractor, and was staying the course. But the way he was doing it was costing him his reputation with other customers due to late deliveries, and slowly bankrupting his company. The last I heard after I left the company (for obvious reasons), under pressure from his bank, he was forced to sell the business for whatever he could get out of it, and went back to being just an employee of the new company.

The lessons to be learned here? Prioritize both your time and your business decisions on activities that make money, not that just stroke your ego. And another side lesson is, if you want to take on a long-term project to position your company for future growth, make sure you have either the profit or proper external financing to fund it. If you lack expertise in these other areas, then seek out professional advice (and listen to it).

 

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