A new client came to me with a common problem. His firm’s revenues had slowed to nearly a halt, while his overhead kept growing — leading to a nose dive in profitability.
His proposed solution was to take out a loan. I told him that was a bad idea.
The key lesson here is: Don’t find solutions until you’ve figured out what caused the problem.
A benefit of first identifying the is that businesses tend to face the same problems. Consequently, the problems tend to be well known and well documented — as are potential solutions.
In the above case, the owner advisor was facing what I call a “growth barrier” — the point when revenue growth slows down while expenses continue to rise. This puts considerable downward pressure on one’s profits.
As many owners do, this advisor wanted to borrow his way through the barrier. While in rare instances that can work, typically getting a loan will only make your firm’s problems worse. Here’s why.
When the profits in an independent advisory firm begin to decline, owners almost always look to increase revenues. But usually, revenue growth isn’t the problem, and the costs involved in increasing revenues only make things worse.
One of the biggest problems with independent advisory businesses is that they tend to be “cash cows,” generating substantial cash flow, which allows owners to get a bit loose with their spending.
The result? When times get tougher, they don’t have controls in place to monitor and limit business expenditures.
And, when profits start tightening, many firm owners look to borrow money to tide them over, either personally or in their business.
But borrowing isn’t likely to solve business problems. Plus, it often makes them worse, because now debt service is cutting into profits and cash flow.
Most owners are better off if they focus first and foremost on solving their firm’s existing problems.
At this point, many owners turn to marketing to bring in more clients and revenues.