The Profit TV show season premiere aired last night. I love this show! Every business owner should watch it.
If you'd rather listen to the blog post, watch the video. The written blog post appears below the video.
Last night's episode featured Farrell's Ice Cream Parlor.
- $17M in sales
- 5 locations
- 3 locations make a combined profit of $600K
- 2 locations lose money and bring total profit down to $250K
- The 2 locations that are losing money burn almost 2/3 of the profit
- No cash reserves
- $1.9M in debt that includes bank loans, legal fees, store build-out loan, taxes and trade payables
- Company run by two business partners where one partner has no knowledge of the finances
- Owners said rent was too high
- Owners opened several locations in a very short period of time
- Marcus Lemonis concluded there was no cash or assets, and the only value in the business was its brand
- $250K profit out of $17M gross revenue is a 1.50% profit margin. In general, a healthy profit margin for a business is around 20% as this will provide profit-taking to the owners and cash to invest back into the business.
- A business can survive on the cash that a 1.50% profit margin generates if there is no debt. However, there is not much cash for growth. Borrowing money for growth is not an option because cash will be used up in debt service.
- Using profits from profitable locations to subsidize losing locations is almost always an emotional decision and not a business decision based on sound financial principles.
- Be very cautious and conservative when you make rent and location decisions. You can't pivot on this business decision when you don't generate enough sales, because leases are long-term financial commitments. Rental leases are just like debt. The cash outflow is fixed, no matter what sales you are making.
- If you are an owner of a business, you need to know the financial numbers. If you have a business partner who "handles the finances," you still need to know the financial numbers. If you are having cash flow or profit problems, ALL the owners need to know ALL the details ALL of the time. Hard times is when all owners need to be 100% plugged-in and taking 100% responsibility for the problems and solutions. Once the business gets back to having positive cash flow and profits, the non-finance owners can back off on knowing all the details. However, all owners should know key monthly numbers such as:
- gross profit margins
- labor cost
- cost of materials
- total cash entering and leaving bank account
- gross revenue
- key inventory item sales figures
- final net profit number and profit margin
- accounts receivable
- accounts payable
- Business growth is not the answer to cash flow and profit problems. More sales can be an answer, but not growth. Growth means increasing fixed costs and labor to generate more sales. If you have problems with "people, process and product," growth only exacerbates the problems. If you can manage more sales with the same infrastructure, this will help you stay alive long enough to fix the problems. Remember that more sales will not fix the people/process/product problems. Only you can fix these problems.
- Debt itself is not bad. It's how people use it that's bad. Debt is a tightrope. Debt can get you to the other side, but if you don't know how to walk the line with debt, it will kill you. Most people misuse debt because
- They are inexperienced in business debt and how it sucks up cash
- They use debt as a band-aid while they remain in denial of the real business problems
Please note: The assumptions and opinions here are for teaching purposes only. I in no way mean to insult or throw shadow on anyone's character or business acumen. I understand that very limited facts are presented in the TV show, and I'm aware that there's always more to the story.