Assets: Austin’s Cycle Shop
Austin, as always, was searching for ways to grow his business and become more profitable. He saw his larger competitors in the market thriving as the popularity of cycling as a form of exercise and as a competitive sport grew. He wanted to take advantage of the boom, but was struggling. Austin had been digging into his cash over time, and now he had an opportunity that could change his future profits, but he wasn’t sure he could take advantage of it.
Austin’s supplier said that if he placed larger orders for bicycles, parts, and accessories (his inventory, an asset), he could get a substantial discount. If he could reduce his cost of goods sold, Austin could lower his sales prices—which could mean more units sold and more profit. But Austin would need more up-front cash and storage space, which he didn’t have. He couldn’t sell his inventory of bicycles and parts faster to generate more cash flow because he didn’t want to lower his prices anymore. He couldn’t borrow any more money because the bank didn’t think he had enough asset strength to support a loan: His liquid assets were not sufficiently large in relationship to his liabilities.
Austin wondered if he had been neglecting his asset strength and if it would cost him a major opportunity to take his business to the next level.
He started thinking about bringing in an equity partner to invest in the shop. With more cash, his balance sheet would be stronger, his liquidity would improve, and he would be able to place larger inventory orders, lower his price, sell more bikes faster, and generate more cash and profit. It was the best choice, he decided, and he started the process of seeking out an investor.
Austin only wanted to work with an investor who was knowledgeable about his industry and who could bring experience to the table. He’d tried the silent investor path with his brother-in-law, and that hadn’t worked well. As he talked to investors and as they looked at his financial statements, they asked questions about his operations, specifically how he was utilizing his assets. When Austin began considering their questions, he came to some important realizations about his company.
First, he was not using his human capital in the smartest way possible. He had his one sales associate, who worked for part salary and part commission, working hours when Austin couldn’t or didn’t want to be in the store, which really meant when business was slow. But now he realized that he also needed her there when business was booming, to help close more sales. So he decided to shift her hours so that she could generate more sales per hour of work.
He was also wasting leased space. He was storing a fair amount of inventory in the back room, when he could be using the space to expand his bike service and repair operation. His was one of the few shops that offered that service, so he needed to maximize it. He could lease warehouse space for much less than his retail space, and then use his retail space to generate more service revenue. He would have to hire another technician, but his margin on service was better than his margin on bike sales, so he thought it would be worth it.
Making these two simple changes in how he utilized his assets resulted in immediate growth in sales and profit. And the interest of two investors.