Contributed by Adam Robinson, the Chief Hireologist at Hireology, located in Chicago, Illinois.
I started my business in 2004. By the middle of 2007, sales had grown to $4M a year. I had 21 employees, a great culture, and was a leader in the industry. I had my sights set on the Inc. 500.
Being an upstart business-outsourcing company means that you have a small number of customers who generate a huge percentage of your revenue. In my case, I had two clients on multi-year agreements, which together made up 75 percent of my company’s business. Furthermore, running an outsourcing firm is incredibly capital-intensive. Combine a cash-tight business model with 300 percent growth, and I was one late-paying customer away from coming unglued.
Scary? You bet. “I was the nature of the business I’m in,” I constantly told myself … and anyone else who pointed out that I was heading for disaster. With long-term contracts in place at these two large accounts, naively, I wasn’t concerned about losing either of them. I spent my time worrying about growth. The fun stuff, right?
In October of 2007, I lost my largest customer, which was 40 percent of my company’s revenue. They had announced a merger with a rival, and the rival’s legal team stepped in and gave me 30 days’ notice and a breakage fee with a note to “take it or leave it.” Given the prospect of suing a publicly traded company, or taking the $50K check, you can guess what choice I made.
Before I could work out that math, my second large customer used a loophole in my contract to back out. The legal justification was a stretch on their part, but, again, I wasn’t in a position to challenge a public company in the courts. These guys didn’t offer a check, either. No notice period was given. In the span of 60 days, I had gone from a revenue run rate of $4M a year to an annual run rate of just over a million dollars. What’s more, I had $3.8M a year in operating costs. It was December 2007, and the proverbial “worst case scenario” had just happened a week before Christmas. I was scared about losing everything— my company, my home, my reputation.
Faced with the prospect of a total personal financial meltdown, I put pen to paper and came up with a path to get through this self-caused catastrophe. It wasn’t pretty, but I didn’t have any choices. I had to stop the bleeding immediately. We went from 21 employees to five overnight. I cancelled every cancelable contract with non-core vendors, and called all of my other vendors and explained my situation. Surprisingly, nobody pulled service. I learned what it means to have good suppliers.
I called my bank and told them the news. Since our receivables were going to plummet—and my line of credit was secured by 80 percent of A/R—we were on our way to be unsecured on our $650K line of credit. Amazingly, they agreed to 12-month forbearance. I learned that telling your bank the bad news right away is the right approach. The second half of 2008 was painful for everyone, but my pain wasn’t caused by the credit crisis. My pain was totally avoidable and entirely of my own doing.
My firm has since stabilized, and we’re doing well now despite the near-death experience. In fact, we’re four times as profitable on a quarter of the revenue. There’s no way I would be managing my firm with this level of diligence had I not been forced to do so in order to save it. Self-preservation is a powerful motivator.
What else did I learn? I learned that revenue growth is meaningless if it’s not profitable. Thin margins always catch up to you. Second, I learned that cash-flow forecasting is a core competency of any successful entrepreneur. It’s not glamorous, but the point is to have excess cash fall out the other side of the machine.
Third, I learned that really am cut out for this line of work, despite my own constant self-doubt. You can’t learn this stuff in a book. You have to live through one or two worst-case scenarios to know what you don’t know. And there’s a lot I still don’t know.
Looking back, I wouldn’t trade this experience for anything.