Case Study: Owner Working Hard but Making Little Personal Income

QuantumCFO provides professional financial management services to smaller or mid-sized businesses that are not normally available or affordable to them. 

Acting as a part-time CFO, we help companies improve their reporting, controls, decision-making, and more on an as-needed basis.  So, whether you need a short-term project or a long-term solution, our model can meet your needs.

The Challenge

The business owner had been working hard for years, the sales were growing at a reasonable pace, but the owner was effectively not making any more income personally than when he started the business.  To compound the problem, the owner was required to personally pay taxes on the business’ accrued Net Profit even though he was actually receiving relatively little of that income personally.

The business was continually becoming more stressful, and continually taking more of the owner’s time.  Among other things, the owner periodically needed to put large sums of his own money into the business.

The Solution

QuantumCFO first performed a comprehensive analysis of the business model, the business operations, and the financial management of the business.  The analysis determined that the owner should be able to receive substantially more personal income and should not need to put additional personal monies into the business, and identified a variety of issues that were contributing to the problem.

This included such issues as: carrying unnecessary operating expenses that had developed over time; inefficient inventory purchasing; carrying too much debt; continuing to operate divisions that were losing a substantial amount of money every year; improper cash management, resulting in capital shortages that were expensive to address, and typically addressed with the owner’s money; an improper Income Statement budgeting system, and no financial forecasting system, resulting in an inability to properly control expenses and manage financial details; a banking relationship that was more costly than necessary; an accounting structure that resulted in paying more taxes than necessary; and failure to properly protect the owner personally from financial risk associated with the company.

From the analysis, QuantumCFO designed a comprehensive solution and worked with the owner to implement it.  The solution included: with a fresh set of eyes looking at the operations, materially reducing operating expenses through improved efficiency and cost-effectiveness; establishing a systematic Inventory Management System, to reasonably avoid back-ordering while not unnecessarily tying up lots of cash with excess inventory; restructuring the debt to a more suitable structure that involved significantly less cost; eliminating business divisions that were continually operating at a loss, with a cost-effective wind-down; establishing and maintaining a comprehensive financial forecasting and Cash Management System for the company; transitioning the company to a new bank that was much better suited for the business; restructuring certain accounting areas to reduce taxes; and restructuring the owner’s form of ownership to provide much better protection personally concerning risks associated with the business.

The Outcome

The owner is now making five to ten times as much personal income every year as he was previously.  The owner does not need to spend as much time on the business, and the stress level is significantly reduced, as a result of the “down-sizing” that resulted from eliminating business divisions that had continually been losing money and the overall improvements to the financial management of the business.  The Income Statement and Cash-flow Management System and related forecasting that is now being maintained allows the business to always stay ahead of potential issues and optimize outcomes.

This improved Financial Management System allowed the business to get into a new banking relationship that is supportive of the business as a good partner, with substantially less cost.  The business and the owner are paying less in taxes.  The new Inventory Management System is significantly reducing the drain on cash, and freeing up needed space in the business’ warehouse.  Also, the new form of ownership significantly improves the owner’s protection against liability exposure associated with the business – while also providing significant estate planning benefits.

The benefits the owner derived from this process, both monetarily and in way of peace of mind, far exceed the cost.