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ACCOUNTING

The Cobbler's Shoes

An experienced accountant explains how she lost sight of the bottom line when she started her own company and why.
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Twenty years of accounting should have prepared this entrepreneur to run her business by the numbers. So why did she lose track of her bottom line?

Here's the good news: my business has grown 400% in five years. I love what I'm doing, and I'm excited about the opportunities ahead. On the other hand, my bookstore is still small ($1.5 million). I have already invested several hundred thousand dollars and need roughly $1 million to become large enough to compete effectively in the long run. So on both the personal and the financial front, I still confront the question that has challenged me since I opened up shop: how do I grow?

In 1990 I started a general bookstore after 20 years as a certified public accountant. I'd been a partner at a nationally known accounting firm, where I was also the national tax director. I considered myself financially savvy. Working on private and public offerings and mergers and acquisitions had taught me about sophisticated notions of financial analysis, healthy balance sheets, and returns on assets and equity.

You'd think I would have immediately focused those skills on my business. But no. When I started my little business, I found myself concentrating instead on marketing -- what I intuited a book customer wanted. I developed a store with a friendly and inviting ambience and a skilled staff; an intriguing, diverse, and large selection of books; and attentive customer service. That mixture produced an enthusiastic response from customers and the media. We grew by 30% to 75% a year, every year, and in 1995 we had the honor of being chosen Bookseller of the Year by Publishers Weekly.

The problem was that my numbers stank. Specifically, my inventory turnover was too low and my costs were too high, and I lost $233,000 from 1990 to 1992, becoming marginally profitable in 1993. Whenever I became concerned about monitoring costs, I assured myself that the way we were spending money -- on a first-class newsletter, author events, and extra staff -- was right and that the numbers would turn around. Unfortunately, they didn't. And my approach was to simply make up whatever shortfall we had in the business with my own personal resources.

So where did that leave us? We were a business that had developed a marketing strategy and a style of bookselling that had broad appeal. But we ended up with an abysmal balance sheet, and I had invested close to a quarter of a million dollars. The irony was that after I'd spent 20 years as an accountant, it seemed that my strength was in marketing and my weakness in accounting.

Uncomfortably, I forced myself to explore how I had allowed myself to be blind to the high costs I was incurring. I realized that the reasons had to do with my unspoken belief that my bookstore was a mission outside the rules of the "real" businesses I once dealt with.

As a small-business owner, I had acted as if I were somehow exempt from normal financial standards. For instance, I never thought to think about the return on my investment in the business. I was "building a future." Not only that, but I allowed my optimism to affect my bookkeeping. We were growing, and I continued to write budgets assuming I would develop an economy of scale that would bring our operating expenses in line. Finally, because in my past job I had grown used to big numbers, I found myself unwilling to "compromise my mission" for only $2 or even $200. For instance, our shopping bags -- which had our logo on both sides -- were made from 60-pound paper, costing me $2,500 a year more than they would have if I had used standard-weight bags.

Additionally, I was accustomed to managing highly compensated, ambitious people. But the pay scale in retail is so dramatically different that I assumed traditional management principles were not appropriate. So I didn't institute goal-setting procedures or set productivity standards or even include the staff in meeting financial objectives.

All that changed when I finally realized that I needed a complete philosophical shift. I needed to consider my business a business -- meaning that all the principles I had learned in 20 years mattered, even to a small business like mine.

I gathered my employees and told them that we would make several dramatic changes. First of all, I refused to put any more of my own money into the business. Instead we would have to become more efficient. That meant that suddenly, details began to matter. In addition to my monthly profit-and-loss statements, I began to use cash-flow analysis to monitor those details. In a business in which net profits are 2.5%, watching one dollar makes a real difference. We shouldn't print 50-page reports that weren't useful, I said. We should be checking the price of toner, and we should evaluate the value of time-consuming tasks. Personally, I had to focus my time on those activities that produce quantitative and qualitative value. It is still difficult to measure that, but I try.

I also tried to manage my staff more professionally. I adopted human-resources practices I had learned at my accounting firm and became more formal about setting goals with my staff. Much to my shock, we came up with a mission statement. I had always found such exercises to be a lot about process and only a little about results. But using the mission statement as a standard against which our staff members evaluate their own activities has been very exciting. They take more responsibility and contribute ideas. The most impressive result is that our inventory turnover has increased by 50%.

Yet that epiphany has been merely a wake-up call for me. Now that I have finally applied my experience to my business, I still confront the challenge of growth.

I believe that my business has incredible opportunity, but it also needs to be bigger to really be competitive. In retail, economy of scale matters. For that I need outside money -- probably about $1 million. Of course, many potential sources won't bite. We need too little money to make it worthwhile for most venture firms, and our projected 20% rate of return won't persuade venture capitalists to take on the risk. On the other hand, we need more than I can find by taking out a second mortgage or running up my credit cards. That's why I believe the best direction is to seek out private investors. I am also pursuing strategic alliances. But most important, I'm hopeful that since I have a sound business plan and a professional approach, opportunities that will help me to go through to the next step will emerge.

The next step: that is the challenge. I feel I've learned and can move forward. But what will the investment world make of my five-year learning journey? Will I look like a business that didn't get lean soon enough, meaning that growth won't make a difference? Will I look like a business that gained market share at whatever cost it took and is now poised to exploit that niche? Or will I look the way I feel: like a woman who has done some things well and some not so well, but who is now ready to turn her lifelong dream into a larger and more professionally run business? I'll keep you posted.

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Roxanne Coady is owner of R. J. Julia Books, in Madison, Conn.




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