See no evils

Written by Rick Spence

Every entrepreneur knows that problems are just opportunities in disguise. But some opportunities are also disasters waiting to happen.

When Ally Ghieri joined Dante Manufacturing as its CFO, she knew it wouldn’t be easy. Dante (not its real name) had even made the PROFIT 100 list, which meant it faced all the problems endemic to fast-growth companies: supply challenges, talent shortages and cash crunches. In short, the job looked like tons of fun.

Sadly, Ghieri (not her real name) soon found herself trying to put out an inferno with a garden hose. Undermanaged and overcommitted, Dante was hemorrhaging money. Ghieri would test her skills as never before, trying to save a company that was collapsing under its own weight.

To help other firms facing similar problems, I asked Ghieri to share with PROFIT readers the lessons she learned under fire. To protect the innocent and the guilty, however, she would only do so anonymously. So, while I’ve fudged some of the facts, please accept the following rules of survival as genuine dispatches from the seven circles of entrepreneurial hell.

Look before you leap into a relationship with another company — as an advisor, supplier or customer

Ghieri had expected to encounter problems when she joined Dante. She had spent 10 years in the troubled manufacturing sector, and she knew that fast growth brings problems all its own. But she let Dante’s track record of innovation and marketing success go to her head. Ghieri now knows she should have asked better questions about the company’s financial condition before she accepted the job — but even that might not have made a difference. The CEO was smart and capable, but the company’s problems were so complex that he had no idea how close to the edge Dante was running.

Understand where your profit is coming from

Soon after Ghieri joined the company, she realized a horrible truth: Dante was making all its profit from foreign exchange. Most of its customers were in the U.S., and the Canadian dollar was trading at US70¢. That made it easy for Dante to undercut American competitors. Using a proper management-information system would have made it obvious that Dante’s operations were dangerously close to the line; if the Canadian dollar were to rise to US80¢, the company would start losing money.Companies should continuously strive to control costs and improve margins. But at Dante, getting product out the door was always more important.

Don’t stint on professional advice

“Entrepreneurs are cheap,” charges Ghieri. Many shun consultants and accountants simply because they resent paying professional-level fees. Although Dante’s CEO got quarterly reports from an accountant, he refused to engage the accountant to assess the firm’s operations. Had he done so — or even just read the management letter that accompanies his annual statements — he might have realized how much trouble the company was in.

Never neglect your financing terms

Soon after joining Dante, Ghieri discovered it was regularly bumping up against its bank operating line, which, despite Dante’s growth, hadn’t been increased in years. The CEO or accountant should have pushed for more credit, even getting quotes from other banks to motivate their lender to budge. Dante should also have applied for term loans to fund specific marketing and production expenses, relieving pressure on the operating line.

Stop the bleeding

Hard times call for hard decisions. As the loonie took flight, Dante was forced to hike its prices. But times were tough all over, and its U.S. customers refused to pay more. With the red ink starting to flow, Ghieri and her CEO made the only decision they could: they cancelled orders to U.S. customers, which accounted for more than 50% of Dante’s revenue. Better a lame duck than a dead one.

Cut costs carefully

With half of Dante’s revenue gone, the company had to shrink its cost base — fast. But mistakes were made. Regrettably, the company cut wages and benefits to production workers without seeking their input or explaining why such a drastic move was necessary. That turned potential partners into angry opponents. When Dante later needed workers’ goodwill to keep production flowing despite payroll shortages, the workers put down their tools instead.

Explore alternative financing before you need it

As conditions worsened, the bank warned that its continued support was contingent on Dante raising more equity capital. Suddenly, Ghieri had to learn all about private equity, mezzanine financing and asset-based lending. Identifying potential suppliers took weeks; negotiating possible deals took months. Ghieri was just days from a deal when the firm’s creditors blew the whistle. Dante died of self-inflicted wounds.

Now working in financial services, Ghieri hopes her company’s story will inspire other entrepreneurs to make the simple changes that could help them survive their own voyage into the inferno. As the real Dante wrote: “The secret of getting things done is to act.”

Originally appeared on PROFITguide.com