Case Studies: Growing Business but Losing Money

Growing Business but Losing Money

A client came to us with a serious problem: he had a growing business but was losing money; his lenders had lost faith in the company. The business had taken on considerable debt to fund specialized machinery that greatly expanded the company’s capacity. Although the business had grown, it still wasn’t operating near its new capacity. The lender’s withdrawal of a line of credit had meant the company moved to a factor to borrow against its receivables, incurring tremendous costs and fees.
We analyzed the situation and found that 1) the cost of capital had grown tremendously as this company had been forced to move to more and more expensive sources of capital, and 2) that the accountant had used a five year life for the new machinery, causing a very high depreciation amount that exacerbated the company’s losses. We were able to convince the accountant to restate the company’s results, according a fifteen year life to the specialized equipment. This action by itself added $1 million to assets and net worth, curing a deficiency in the capital account. Secondly, we showed what the company’s recent history would have been if it had been able to attract capital under more normal terms. In that case, the company would have been profitable, as the nearly $1 million of annual interest cost would have been substantially reduced. We were able to find a new working capital lender, reducing all in costs on the company’s line of credit by 12 points, and to bring in a new mortgage for the building, reducing that rate by 5.5 points. With these new facilities, the equipment lender decided to stay with the company and go forward.