Journal Maker Bound, Determined to Grow

Constant worry about money was wearing down business owner Pamela L. Barsky. She feared her company was failing despite steady orders for the handmade photo albums, address books and journals she designed.

Her biggest customers, including some national chains, often took weeks or months to pay. Cash demands were a daily challenge at her Los Angeles company, Pamela Barsky Wholesale.

“That scared me every single day,” said Barsky, 39, a former copywriter, whose products with their signature quirky messages are carried by stores such as Z Gallerie and Papyrus.

Although she employs one full-time employee and three part-timers, Barsky had given up on a paycheck for herself, resorting to personal credit cards to buy supplies. She knew sales would have to triple to $1 million to provide her a decent living, and she longed for sufficient resources to enable her to focus on her strengths in design and marketing. To make matters worse, she was worried about the state of her credit after the closure of her previous gift shop business.

“It’s not going to change unless we change and do different things,” said Barsky, who started her latest company in her apartment in 1994.

Growth is critical for the company’s future, agreed veteran consultant Paul Ratoff of Los Angeles-based Moss Adams Advisory Services. But it will mean even more demands on limited capital--a dilemma many business owners face.

After a visit to the firm’s warehouse and a review of operations, Ratoff was convinced that Barsky had a unique product and a niche market on which to base her company’s growth.

“It’s a good concept, but she’s in a big market, so she’ll have to be able to figure out a way to grow the business in the little niche she has developed,” said Ratoff, a certified management consultant. To boost sales while conserving cash, he recommended that Barsky eliminate her 15 outside sales representatives, focus her own sales efforts on key accounts and expand the product line. To help ease money worries, he suggested she focus on profits, incorporate the business to protect her personal assets and apply for a line of credit.

Additionally, as the business owner, Barsky can no longer afford to spend her time gluing paper and packing inventory, he said.

“She has to step back a little more and focus almost exclusively on developing . . . and selling the product,” Ratoff said.

The company’s sales strategy--a combination of weak outside reps with no exclusive territories and numerous accounts that Barsky handles in-house--is expensive and inefficient, he said.

Reps earn 15% of sales, or about $50,000 last year alone.

That money would be better spent developing a more effective catalog and hiring a full-time customer service rep to sell over the phone, Ratoff said. He also suggested that she take some extra help to the eight to 10 trade shows she attends each year. She’d still have money left over to invest in new products to expand the line.

Barsky also could increase sales by personally cultivating half a dozen key accounts. Ratoff would like to see her devote about a quarter of her time developing products or creating special sales programs for large, multiple-store clients.

These relationships, along with the direct customer contact that the company will have when it terminates its outside reps, will provide the feedback Barsky has been missing since she closed her former gift shop business, Ratoff said.

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At Ratoff’s request, Barsky came up with several ideas for growth, including developing a Web site, expanding into non-stationery items such as picture frames and taking in bindery jobs or design work for other companies. She also has considered developing a card line and creating a higher-end version of her current product line.

Ratoff helped her narrow her focus to the last two strategies using a variety of criteria, including some common-sense advice applicable to any expansion-minded business: Don’t stray too far from your core identity. He recommended that Barsky choose only one of the two options, given her limited resources.

Before tackling her money worries, Ratoff made a point of explaining that bigger sales are not the only way to reach her goals. Focusing on profits will get her there faster.

Barsky first has to find out if she is actually making a profit. Tracking her business on a cash basis, as she does now, can muddy the picture, Ratoff said. Too much of her cash is tied up in inventory and accounts receivables to know whether she is making money or just liquidating assets. He suggested that she switch to an accrual-based system, which would allow her to count a sale when she ships the products. Currently, she doesn’t count a sale until she is paid, which in the retail business can be 30 to 60 days after the order is shipped.

Second, Barsky needs to clearly understand her costs and expenses. Ratoff recommended that Barsky’s manufacturing costs, including materials, labor and damages, be in the neighborhood of 45% of sales. That would leave her company with a gross profit margin of 55%--a figure that will vary from company to company and between industries.

Given her target gross profit margin of 55%, Ratoff suggested the Barsky budget her annual operating expenses to allow 15% to 20% for sales and marketing, 3% to 5% for shipping, 8% to 10% for administration (including rent, fees and supplies) and 1% to 2% for interest costs. That would peg her operating expenses at 27% to 37% of sales. Once those expenses are subtracted from the 55% gross profit margin, Barsky will end up with a net profit of 18% to 28%. Barsky should take a salary out of that net profit and reinvest the rest in the business.

His final advice on maximizing profits applies to any business. A big order shouldn’t mean automatic price discounts unless there are economies of scale in manufacturing or other operations. Again, it’s important to protect the company’s gross margin.

Barsky should also protect her personal assets. That’s why Ratoff recommendsthe company switch from a sole proprietorship to an S-corporation. The move will limit Barsky’s personal liability and reap the company some tax advantages as well.

To pay for growth, he suggested the company apply for a small line of credit of between $25,000 and $50,000.

“She has established herself with good product, she has a decent account base and she’s been around for a while . . . so I think she’s ready for the next step,” Ratoff said.

But he says she’ll first need to work with her accountant to prepare a 12-month projection of income and cash flow to show potential lenders.

Then it’s time to talk to bankers. Barsky should check her Dun & Bradstreet and credit reports beforehand to make sure there aren’t problems she can’t explain. She should arrive at the banker’s office armed with three years of tax returns, the opening balance sheet for her new corporation, the corporation’s minutes and bylaws, a personal financial statement, the 12-month projection, current accounts-receivable information and a list of equipment and inventory transferred to the new corporation.

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Barsky figures she has a 50-50 chance of landing a line of credit. She’s inspired by a friend, also a creative type, who built a multimillion-dollar business.

“I remember the day she put on her suit and got turned down by 30 banks, and the 31st person gave her the loan,” Barsky said.

She’s eager to get her own company rolling.

Barsky already has fired her outside sales reps and is preparing an application for a line of credit. Last week, she began work on the new catalog, which she estimates will cost $10,000 to produce, compared with the $600 she spent on the existing catalog.

Perhaps the most important thing she’s accomplished since her meeting with the consultant is to gain a sense of confidence, she says. It was a relief to learn that her cash flow problems were typical, not a sign that she was running the business into the ground. As an entrepreneur with no formal business training, she was relieved to find she had done more things right than wrong. And she is learning not to take the company’s money woes personally.

“I’m less afraid now,” Barsky said.

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This Week’s Company Make-Over

* Company name: Pamela Barsky Wholesale

* Headquarters: Los Angeles

* Type of business: Designs and manufactures journals and photo albums

* Owner: Pamela L. Barsky

* Founded: 1994

* Start-up financing: Less than $5,000 from former business

* 1998 sales: $330,000

* Employees: One full-time; three part-time

* Status: Sole proprietorship

* Customers: Stores including Illiterature, Papyrus and Z Gallerie

Main Problem

Tight cash flow; unsure how to grow the company.

Goal

Triple sales to $1 million so owner can take a salary and have time to create new products; stop worrying about money.

Recommendations

* Eliminate outside sales representatives.

* Expand product line.

* Focus on profits, not just sales growth.

* Apply for a small-business loan from a bank.

Meet the Consultant

Paul Ratoff, a business consultant for more than two decades, is a financial and certified management consultant at Moss Adams Advisory Services in Los Angeles.