Three years ago, a prospective client reached out to us with the desire to increase capital. After the initial meeting, we learned that sales were up year over year and business had never been better. All signs pointed in the right direction, yet the company still struggled to make payroll and even had a payroll tax lien against them. We wondered: what gives? Where was the disconnect between the successful firm we heard all about and this immediate need for capital? Like with most of our clients, it all began with their reporting process, and in this specific case, inventory management.
The small business utilized a 10,000 square foot warehouse they kept filled with parts that their service professionals could simply grab and go use at any time. Outside of reordering parts as needed, the firm rarely had a handle on how much their current inventory was worth. In their particular case, this was extremely important for two reasons: adhering to their financial covenant and loss prevention.
When a bank issues a loan, they include a variety of financial covenants that specify the frequency of submission for financial statements, minimum balance sheets, and more. Inventory is a line item on the company’s balance sheet, as well as other financial reports. Without a firm grasp on what that inventory number really is, a company is at risk for the bank to call the loan. Given the fact this particular business was were inquiring about additional capital, chances were are they wouldn’t have the funds to cover the first loan if called.
“The recorded value in your books must match the physical value in your warehouse.”
In this situation, proper inventory management was also crucial in order to prevent further loss. When owners and managers rely on their service team members to record what parts were are taken to the job site, they put themselves at risk for regular errors. We always believe that people have the best intention to follow procedures, but internal loss remains the greatest reason for theft for industries across the board. When we took a look at the reports for this organization, we noticed the cost of goods sold (inventory) wasn’t proportionate in growth to the sales. In other words, more goods were needed to complete less sales. This tells us that goods were disappearing. The first week we put inventory management tracking into place, three employees quit. Coincidence?
Circling back around, did this company really need an influx of capital? Sure, in order to “weather the storm” while new processes and procedures were put in place. Today we’re happy to report that the company reported $8 million in sales last year, and more importantly, is profitable. For the last three years, Coveted has become a permanent fixture of their firm. We work with them on a monthly basis to ensure their bookkeeping is accurate, to properly handle their new found profitability, and to continually improve processes. Because we work IN their company, rather than on it, we’re able to make much more of an impact and build a trusted relationship with not only the owners, but the staff as well.