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how does this happen?

pontifex

pontifex

Lifer
say a manufacturing company has been in business for 25 years.
every year their sales are at least double that of the previous year's sales.
in year 26, something happens that causes sales to drop drastically.

how does one year of bad sales total destroy the previous 25 years and put the company in danger?



 
If costs keep up with sales, they're not going to be actually keeping much in the way of profits. Possibly it's a low-margin business?
 
Originally posted by: yllus
If costs keep up with sales, they're not going to be actually keeping much in the way of profits. Possibly it's a low-margin business?
Click to expand...

unfortunately i don't have enough info to answer that.
the way things were done, it doesn't seem that way though, unless thats part of the problem.
 
Cash flow. Good sales does not equal good profits.

If their labor costs are out of control or their debt costs are very high, they may be essentially living "paycheck to paycheck" and can't pay the bills.

Plus if you have these problems lingering around you can't finance/borrow if you hit a rut.
 
Maybe the company was skewing the books for the past 25 years to make it look like they'd been making a profit, and it finally caught up with them.
 
Originally posted by: pontifex
say a manufacturing company has been in business for 25 years.
every year their sales are at least double that of the previous year's sales.
in year 26, something happens that causes sales to drop drastically.

how does one year of bad sales total destroy the previous 25 years and put the company in danger?
Click to expand...

We could probrably better answer this question if you told us what kind of company.

Being a CPA, and as odd as it may sound, fast growth for a business can be a dangerous thing. Here are a couple of real-life examples:

1) A high rate of growth can mask poor busines decisions & practices. Some times the high rate of growth is a result of too - low prices, and thus no real profit. But the ever increasing sales growth can provide cash flow to mask the problem. You can take the money from new upcoming customer to pay off extra expenses form the last old customer job. Sort of "taking from Peter to pay Paul". When sales level off, or god forbid go down serious (cash flow) problems arise. Similar to what happens in a Ponzi scheme when new victims dry up.

2) Doubling sales can be very difficult to keep up with - in terms of supplying customers with product. Might take a heavy capital cost in terms of equipment & machinery, inventorys, other overhead or an educated/trained workforce. Once you've made the investment (e.g., paying off debt associated with expansion) a decrease in sale will cause cash-flow problems.

Fern
 
Is this a hypothetical situation or are you just leaving out the facts to protect the name of the company?

What caused the sales to drop so drastically?

- The products could have been made obsolete by some new technology.
- The quality of the product or service could have slipped because of bad practices.
- There could have been some legal situation that irreparably tarnished the brand or corporate image.

Any of these could occur over a short period of time causing rapid declines in sales and resulting in potential death sentences for a company.

 
Originally posted by: KMc
Is this a hypothetical situation or are you just leaving out the facts to protect the name of the company?

What caused the sales to drop so drastically?

- The products could have been made obsolete by some new technology.
- The quality of the product or service could have slipped because of bad practices.
- There could have been some legal situation that irreparably tarnished the brand or corporate image.

Any of these could occur over a short period of time causing rapid declines in sales and resulting in potential death sentences for a company.
Click to expand...

its a real company. the reason sales are down is probably because the price of oil is down (somewhat) and its been a warm year
 
Originally posted by: pontifex
its a real company. the reason sales are down is probably because the price of oil is down (somewhat) and its been a warm year
Click to expand...

Well if the sales of your company are directly linked to the price of oil and the average temperature, then there is a real risk to the long term viability or health of the company if either or both of those conditions continue - regardless of the prior financial performance.
 
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