I volunteer time with a group called SCORE, which operates under the Small Business Administration. Their mission is to “… provide professional guidance and information, accessible to all, to maximize the success of America’s existing and emerging small businesses.”
I recently spent some time counseling a couple that has been operating a private ambulance/transport service for about four years. It has grown from a one-man service generating $25,000 in revenue the first year to a business employing 26 people with revenue in 2009 of $785,000. In 2010, expenses have gone up, however, and they don’t think they will make any money this year. They are also having problems with their accounts payable.
It’s an S-Corp business, and they have an $80,000 line of credit with a local bank, which is currently tapped out. The company owns five ambulances and three wheelchair vans. Dealing with hospitals and Medicare means their accounts receivable runs at 120 days. That is very slow, but with these type of accounts there is little danger of defaults.
Several months ago, we ran a series of articles on looking at financial statements and showed how the balance sheet is the key to a company’s health. Of course, being a small family-owned business, they don’t have a balance sheet! But that is something that their banker should have asked for long ago because, the way they are headed, his loan is at great risk as well.
So what’s the problem? It didn’t take very many questions before we discovered that their vehicle maintenance costs were going through the roof this year. They don’t work on a budget either, so this came as an unexpected cost. For tax purposes, they claimed vehicle depreciation each year as a cost of doing business. Vehicle depreciation is not a real expense, however, so the extra revenue that showed in their personal tax return became income. Now their vehicles are 100% depreciated. All have over 200,000 miles and some approach 300,000 miles. Breakdowns are very frequent and expensive. One vehicle broke down on a job over 100 miles from home and had to be towed back. They’ve literally been eating their seed corn!
The solution we proposed was a very tight budget going forward that has to include financing for at least two new vehicles a year either through purchase or lease. They will need to do this quickly before they start having credit problems, which are just around the corner. To generate the extra income that will be required, they will also have to include a marketing program beyond their current word-of-mouth business generation. This is something they will have to undertake themselves since they can’t afford any new employees.
Small businesses aren’t the only ones these days that are eating their seed corn. In the coming weeks, let's look at ways that much larger corporations are doing the same thing in these trying times.