The Story of Michael: A Lesson in Business Realities

Michael (not his real name) was the epitome of a self-made entrepreneur. Ten years ago, he started his business with a dream and a determination to succeed. Through sheer hard work, relentless pursuit of new customers, and a passion for what he did, Michael grew his business to boast an impressive customer base of over 530 clients and annual revenues exceeding £2.5 million. He was proud of his accomplishments and often shared these numbers as a testament to his business acumen and the success of his enterprise.

Despite his apparent success, Michael knew that he wanted more. He had ambitious growth plans but wasn't entirely sure how to navigate the next phase. After some deliberation, he decided to bring in a part-time Finance Director (FD) to help him achieve his goals. Michael saw this as a smart move, believing that an experienced FD could provide the strategic insight needed to take his business to the next level.

However, as the FD began to delve into the company's financials, it became clear that things were not as rosy as they seemed.

The Hidden Truths in the Numbers

One of the first things the FD did was analyse the revenue trends over the past few years. To Michael's surprise, the FD pointed out that the company’s revenues had been flat for the last three years. In fact in the last year there had been a very small decrease. Michael hadn’t been too concerned, as he believed maintaining revenue during challenging economic times was an achievement in itself. But the FD wasn't satisfied with that surface-level assessment and decided to dig deeper.

Upon closer examination, the FD discovered a startling fact: of the 530 customers Michael proudly claimed, approximately half had not made a purchase in the last three months. This meant that the number of active customers was closer to 270, far fewer than Michael had assumed. When confronted with this information, Michael was shocked. He had always assumed that his large customer base was a sign of strength, but now he realised that it was inflated by inactive customers.

The FD went further, analysing customer retention rates, a key metric Michael had not previously focused on. The findings were concerning. Only 61% of customers who had bought from the company last year had made a repeat purchase this year. In other words, 39% of last year’s customers had not returned. This churn rate was alarmingly high and posed a significant risk to the business. Michael, however, had been so focused on acquiring new customers that he hadn’t noticed the revolving door his business had become.

A Misleading Stability

The FD’s analysis revealed another crucial insight. While the overall turnover had hardly changed, this was misleading. The number of new customers acquired was actually less than the number of customers lost. However, the average spend of the new customers was higher, which had masked the underlying issue of declining customer loyalty.

To make matters worse, one of the new customers accounted for a significant portion—10%—of the total turnover for the year. This heavy reliance on a single customer was a precarious position for the business, as losing that customer could lead to a significant drop in revenue.

The Cost Conundrum

As if these revelations weren’t enough, the FD uncovered another critical issue. Over the past year, the cost of the products Michael’s company sold had risen significantly. Yet, Michael had not adjusted his selling prices accordingly. He had been so focused on maintaining and growing his customer base that he deliberately kept his prices lower than his competitors, believing this would drive volume and, consequently, profits.

What Michael failed to realize was that by not passing on the increased costs to his customers, he was eroding his profit margins. Worse still, the margins on the new business he had worked so hard to win were lower than those on the business he had lost. The strategy of undercutting competitors had backfired, leading to a situation where the business was working harder but not necessarily smarter.

The Reality Check

The FD’s findings were a sobering reality check for Michael. His business, which he had always believed to be thriving, was in a much more precarious position than he had realized. The impressive revenue figures and large customer base were a façade, masking deeper issues that, if left unaddressed, could threaten the very survival of the business.

Michael now faced some tough decisions. He had to rethink his growth strategy, shifting focus from merely acquiring new customers to retaining existing ones and improving customer loyalty. He also needed to reassess his pricing strategy to ensure that his business remained profitable, even if it meant losing some price-sensitive customers.

The FD’s intervention had uncovered the cracks in Michael’s business that had been hidden beneath the surface. It was a stark reminder that growth isn’t just about increasing revenues or adding new customers; it’s about building a sustainable, profitable business with a loyal customer base. 

Moving Forward

With the FD’s help, Michael began to implement changes. He introduced customer loyalty programs to improve retention rates and started tracking customer satisfaction more closely. He also adjusted his pricing strategy to reflect the true cost of his products, ensuring that the business remained competitive while maintaining healthy profit margins.

Michael learned that business success isn’t just about the numbers you see; it’s about understanding the story behind those numbers. The experience taught him the importance of having a clear, accurate picture of his business’s health and the value of bringing in external expertise to provide a fresh perspective. It also taught him the benefit of having on the team someone upon whom he could rely if only on a part time basis.

In the end, Michael’s business emerged stronger, more resilient, and better equipped to achieve long-term growth. But the journey to get there was a humbling reminder that even the most successful-looking businesses can have hidden vulnerabilities.