Clarity
Small business
The situation
A small primary production business with revenue of about $128,000, a large cash balance and almost no debt. The obvious question was whether to put that cash to work.
What it found
Sales fell 11.9% while operating costs rose by about $16,600. Operating profit fell 57%.
More than 90% of the year’s profit came from income outside the operation. The healthy-looking margin was not coming from the business itself.
The operation was running less than 5% above breakeven. A modest fall in sales would tip it into an operating loss.
The cash was real. The earnings it seemed to support were not.
The context
Workshopping the findings explained the fall in sales: several seasons of severe weather had cut yields. That changed the question from “what is wrong with the business?” to “how long can it carry the cost base until yields recover, and what should it do with the cash meanwhile?”
What it recommended
Hold the cash. Explain and repair the cost increase within 90 days. Identify the outside income. Expand only once the operation pays its own way.
Why it matters
A standard scorecard would have rated this business healthy. Looking at where the profit actually came from changed the answer.