Optimizing Operations

Situation

A $5-million Internet retailer of consumer goods, which started up eight years ago, was starving for cash as it faced the beginning of its seasonal slow period. The company’s infrastructure was fairly solid with good people, software and operating systems. The hands-on entrepreneurs approached Platinum Group to play an active role in eliminating a $130,000 cash shortfall and to transition the company into a long-term, profitable operation.

Challenges

• Connection to the marketplace, from a sales standpoint, was the primary weakness.
• More sophisticated organizational processes were required to support the growing business.
• Capital deficiency due to surplus inventory at market slowdown and creditor stress.
• Lack of management reporting prevented tracking cash flow and avoiding shortfalls.

Solution

After a brief assessment, Platinum identified key areas of the company to optimize including its web site sales efforts. Five different sales channels were enhanced, including multiple e-commerce websites, Amazon, eBay, and retail. By optimizing the relationship between inventory, pricing and marketing on the website, the company was able to convert inventory to cash during the off-season. A daily system was installed to indicate sell-through levels by sales channel to measure effectiveness and modify pricing as needed. The company was encouraged not to sell an item below cost but to reduce normal margins and sell off items not to be carried into the next season in order to enhance cash flow.

Platinum helped the entrepreneurs to determine the company’s breakeven point and developed a 13-week cash flow model to proactively review reports and forecasts on a weekly basis and measure actual results to performance. Based on this information, various adjustments to operations were recommended to reduce expenses. For example, a profit-based bonus program was implemented to provide employee incentives and rewards based on the company’s success, which counterbalanced a wage reduction.

Results

After three months, the company is on track to reduce inventory to normal levels and pay down vendors. The $130,000 shortfall was not only eliminated, but also nearly doubled that amount in positive cash in the bank. This turnaround from crisis management to transitioning into a long-term, profitable opportunity will continue in the months ahead.