Domnitz emerged as a budgeter whose emphasis on cost cutting represented a distinct break from the company's old way of doing business. Previously, employees could spend when they felt they needed to; now they had to run expenditures by him first.
Of course, maintaining financial control meant much more than simply holding down costs. It meant keeping control in a larger sense; Domnitz and Schwartz knew they could no longer operate in the statistical dark. They could no longer make intuitive decisions about ordering, hiring, and spending. Domnitz, who had taught himself the basics of a bookstore's numbers by growing his own bookstore business, realized now was the time for him to master the process. He describes the balance of 1986 as the period "when we really started doing structured, formal financial planning."
Before the warning signs, says Eklund, "store managers never really had access to raw numbers, though we were made to feel responsible for them." Eklund's monthly meetings with David Schwartz had been occasions to chat about philosophy and books and, by the way, business matters. Now Eklund and his colleagues sat in the small, cluttered office and reviewed line-by-line accountings of which items were moving and how fast. Domnitz demanded that managers run their stores adhering to basic formulas: What were they spending on payroll as a percentage of expenses? How much inventory were they turning over? What was their cash flow? "Suddenly, we were obsessed with numbers," Eklund recalls. "We were talking about inventory turnover; before, we didn't know what it was."
The improved understanding of the cash-to-operations relationship enabled Domnitz and Schwartz to make decisions based on cash flow. "This is rather shameful, but as we began to look at inventory we came to recognize that inventory meant cash. Before that it meant books," says Schwartz, whose habit was simply to order the books he "knew" would sell.
Schwartz began to change how he ordered. Pattenson had pointed out that the stores turned their inventory over less than twice a year -- poor by industry standards. "I was the macho buyer who bought for the life of the book," says Schwartz. If he thought he would sell 10 copies of a book, he would order 10 copies up front and carry them until they sold. Now, assisted by a computerized inventory system, Schwartz orders in small batches, tracks the numbers, and reorders only when necessary. That's paid off: in 1987 the company's inventory turnover rose to 2.8; in 1988, to 3.2; and in 1989, to 3.7.
Cumulatively, those practices bolstered cash flow. But Schwartz and Domnitz still had one major problem: they had doubled in size without increasing the company's capitalization. "We had zero working capital -- we had no line of credit," says Domnitz today, still sounding awed. "How can you operate any type of business that depends on an ebb and flow of inventory without an operating line of credit?"
Very carefully. Schwartz and Domnitz's cash was tied up in books on the shelf, and, with no available working capital, they stretched accounts payable to the end of each publisher's cycle. Those who wouldn't deliver once their bills were 60 days overdue, Schwartz and Domnitz paid on day 59; those who'd cut them off at 120, they paid on day 119. Publishers put the company on hold. "I spent my days -- every single day -- talking to creditors about extending our terms," Domnitz says.
Schwartz, Domnitz, and their silent partner, Bill Orenstein, ponied up $25,000 each in the spring of 1987. And after another year of seeking capital, Schwartz persuaded his college friend Allen Samson, a local businessman who had made good when he sold his nursing-home company to Transamerica, to buy one-fourth of the business for $220,000. "That was a true second wind," says Schwartz. "With that we could become totally current with our publishers, expand our Iron Block store, and expand Brookfield."
The controls and the capital helped bring them back above water. For fiscal year 1987 Schwartz Bookshops boosted sales to $3.2 million, with a profit margin of nearly 5%. Though they hired no additional employees, that year Schwartz and Domnitz did reinstate full health benefits. In 1988 the stores hit $3.7 million in revenues; in 1989 they reached $4.4 million. And 1990 sales surpassed $5 million for the first time. The ghost of the Pattenson meeting was put to rest.
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By the time Schwartz and Domnitz had learned to run their company by the numbers, their entire market had changed -- radically. The growth in chains was over; the next big thing was superstores.
In the summer of 1990 Schwartz made his first trip to Denver's Tattered Cover bookstore, a 40,000-square-foot store stocking more than 400,000 titles. "I spent two days there," he says. "It was the first time I saw the superstore concept as a bookstore.
"I walked up to a man and almost attacked him for reading a newspaper. It turned out that it was a statue of someone sitting in a chair reading a newspaper. And I thought to myself, 'This store is actually encouraging people to loiter by putting out this statue. There must be something about this sitting-down stuff that works." And, Schwartz reasoned, Barnes & Noble had already opened superstores in Minneapolis and Chicago, and "it was only a matter of time before the superstores came to Milwaukee."
