Recently I met with a CEO who had a strong costing background before he became an entrepreneur. During the depths of the recession he was able to locate a manufacturing company that was in serious financial shape and for sale. As an entrepreneur, his first interest was the possible acquisition of this company. So he spent some time performing his due diligence reviewing the records of the company and looking at the facts and circumstances. Although the company had a very solid and relatively new base of manufacturing equipment, it was losing money and the existing owners did not seem to know what to do to correct the problem.
This entrepreneur, however, did have extensive costing experience and in his conversations with the existing owners and management team he discovered that they had focused their entire sales effort on increasing the top line without any consideration to the profitability of the jobs themselves. As a result, they had some acceptable margin jobs, but they also had a whole family of parts focused on one specific customer and as a result, they were all loss jobs. This entrepreneur then did some analytical work to determine if this key client was absent how it would affect the company as a whole. He was eager to know it would it take to make the company profitable again in spite of this significantly reduced volumes. With appropriate information he was able to make all of those calculations and quickly determine that in spite of the current period of loss, he could eliminate the one customer and regain profitable operations with the existing business. Since the company had lost money for years he was able to make a very low offer compared to the potential upside of company. He knew if someone understood and could manage to the cost structure that was in place, the company could be extremely successful. Ultimately his offer was accepted and he took ownership of the company. That was quickly followed by a demand for price increases to this one very unprofitable customer who immediately pulled all the work and went elsewhere. That loss was then followed by significant cuts in overhead as were pre-planned prior to the purchase to regain profitable operations.
Subsequent to that, the company operated at a modest profit and was able to survive without issue on a reasonable positive cash flow due to the lower overhead structure and limited debt structure. More recently the company experienced large increases in volume primarily as a result of the recovery of the economy. The new owner is now reaping substantial rewards based on his position in the marketplace. This increase in sales volume has not only resulted in increased profitability, but also in the number of hourly jobs available to the local community. He has also helped stimulate the economy by making equipment purchases that were necessary to maintain the current high levels of customer satisfaction. This entire process has taken what would otherwise have been the burdensome financial debacle in the community, to a very successful, contributing, profitable company.
Based on the above account, it is easy to substantiate that cost accounting knowledge was the foundation to this entire process. The knowledge helped to identify the problems that the company was experiencing under the old management, and then provided the new management with the ability to react and restore the company all while setting the stage for future profitable operations. Cost accounting and its relative benefits are always pertinent in today’s business community and can be vital in saving jobs, sustaining families, and providing financial rewards for those individuals skillful enough to understand how it works and how it should be applied.