Contain Sales Growth Chaos
After suffering losses despite a 78% increase in sales, this hospitality POS VAR learned controllership is key to managing growth.
There are POS (point of sale) VARs, and then there are the biggest, strongest, fastest-growing POS VARs. It's the latter group we like to cover in Business Solutions magazine, and this month's feature story subject is far from an exception. But it took hitting the big time too fast for this company to learn what profits are all about. When it comes to fast growth, 1998 to 2000 were, to quote Rich Peterson, "absolutely out of control" at Abacus Business Solutions (Clearwater, FL). Peterson, president of the company, cites top-line sales growth rates ranging from 48% to 78% over the course of those three years. But while sales at Abacus were spiraling into the sky, the health of the business was in decline.
Building Customer Volume, Fast
The awards bullet in the light green sidebar on the right-hand side of this page highlights the customer growth at Abacus. In terms of volume, the company has been Aloha's number one performer for several years now. But the dealer award Peterson beams most proudly over is the Back Office Module Sales Leader award Aloha bestowed upon the company in 2000. It's this award, says Peterson, that exemplifies why his company is successful. "We don't just race in with POS hardware, set it up, and get out the door. We want our customers to integrate their systems and get money out of the stuff they buy," asserts Peterson. Hence, the Back Office award from Aloha. "This is a focus of ours, and it's a lucrative focus." Lucrative as in moneymaking, not just notoriety gaining. But as Abacus learned the hard way, making money and gaining profit are altogether different things.
How To Let Revenue Slip Away
Being perceived by customers as more than just a box shipper is what led Abacus to sales success, but neglecting the financial side of its business is what almost led to its demise. Peterson is a self-described tech-guy turned salesman, and he and his fellow salespeople were lighting up the boards. Meanwhile, what Peterson calls the internal mechanism of his company - the center of which was the accounting department - was in disarray. He knew that keeping the books and handling collections weren't for him. He needed a financial guy, so he hired a bookkeeper. But, what he needed was a visionary - a qualified, proven CFO. So Peterson fired the bookkeeper and hired what he calls a "bean counter." A bean counter by Peterson's definition takes financial responsibility a bit further than a bookkeeper, but he found what he still lacked was an aggressive CFO. "I learned there's three different types of financial guys," Peterson says. "There's a bookkeeper, a bean counter, and a true CFO, who sees the horizon." Peterson is quick to point out that his bookkeepers and bean counters were good people who worked hard and made progress. "But they weren't visionaries," he says. "Now we have a CFO."
Peterson points out several differences between someone who watches the books and someone who manages them. Unqualified employees might not manage A/R (accounts receivable) and HR (human resources) responsibilities properly. Given Abacus' growth from 8 to 47 employees in a matter of only a few years, particular strain was placed on the HR aspect of the accountant's position. "One day you're selling lots of systems and hiring lots of people and the next thing you know you have 401K plans and HMOs (health maintenance organizations) to deal with," laments Peterson.
According to Peterson, his company previously handled deposits incorrectly and mismanaged income. Abacus also failed to stay on top of collection calls. "As a matter of fact," he says, "we wouldn't do any collections at all unless it was an account that owed us a bunch of money." But when you have as many customers as Abacus, all the little outstanding AR adds up to big money. "Our CFO had the skills to fix the mismanagement and reign the outstanding collections in," he says.
VAR Killer: Hidden Inventory Loss
With A/R troubles and tunnel vision honed in on top line sales, Abacus had no idea there was another silent profit killer chewing away at its every success. This VAR killer goes by the alias "shrink." The first leak Abacus noticed in its inventory channel was caused by an RMA (return merchandise authorization) process which Peterson calls a nightmare. "In general, vendors aren't typically very good at handling RMAs," he says. As your business grows, so will the amount of product in need of maintenance you find yourself shipping from your customer to your vendors. If, like Abacus, you have installations numbering in the thousands and several different vendors to send product back to when it breaks or needs to be serviced, you'll need to have someone managing this process. Otherwise, you won't call the vendor enough to keep tabs on the product's status, and your customer will lose faith in you because he's gone for weeks without the equipment, or perhaps because he doesn't like his loaner. The longer that product is hung up in limbo, the more loss the VAR suffers. "We had no reporting mechanism to tell us when these issues were coming up, and these are problems that compound as you grow rapidly," says Peterson. "I think most of the VARs out there in the $1 million to $3 million range are going through the same growth pains, and that's a lot of VARs in an industry growing this fast."
Peterson admits to losing a large dollar value of inventory - to the tune of tens of thousands of dollars' worth - when his company was growing at its fastest rate. He can also cite fellow dealerships that withered away at the hands of shrink and loss. "They'll tell you the number one reason why they've gone out of business is because they lost track of inventory," he says. In contrast, so far in 2003, Abacus claims to have lost only one $210 printer. Monthly serialized inventory counts, monthly "tech kit" inventory counts, and company-wide inventory counts at six-month intervals have helped the company achieve sub-1% inventory shrink. Tech kit inventory is that which Abacus technicians can sign out of the warehouse for demonstrations and lab testing, but which remains in the company's sellable inventory. What's helped the company execute these inventory counts, maintain customer and vendor contacts, and manage product throughout its life cycle is contact management, invoicing, and serialized inventory software from OMD Corporation. "We have to track 25 different serial numbers in our average three terminal system, and we track them for life," Peterson says. Multiply this across thousands of installations, and one begins to understand the value of this dedicated software solution. Now, when a customer calls and gives an Abacus representative the ID number from his or her product, the company can access purchase date information, how the product was received from its distributor (ScanSource), warranty and maintenance plan information, and whether it's a billable account or not. Peterson has difficulty expressing the value of this instant, at-a-glance data view, but he's certain that VARs experiencing growth pains of their own will understand.
Hitting The Post-Growth Plateau
Mismanaged growth can have results similar to crash dieting - what you desire and what you achieve in the long run are sometimes quite the opposite. But at Abacus, tightening the reigns on its business didn't mean crashing. Its restructuring process saw the adoption of OMD's software, the hiring of a real CFO, and the paring down of its workforce by 15%. But it did so with a relatively mild 7% sales recession in 2001. "Just like many other fast-growing companies, when we got busy we just hired another person," says Peterson. "We kept doing that, trying to solve our problems with manpower, and the next thing we knew we had a bunch of people running around without direction." Having many employees with little direction is like making many sales and gaining little profit, or worse, letting that profit slip away. That's a place Rich Peterson doesn't ever intend to revisit.