Losing a business in less than 24 hours is easier than you may think. Just to clarify, I’m not talking about a business that is defined by simply printing up business cards with a company name and a fancy, impressive (albeit fake) title. I’m talking about a living, breathing, revenue-generating business with actual sales receipts at the end of every day.
The second business I had (just like the first), was a fashion brand in the urban contemporary market. One year, in preparation of the holiday shipping season, I decided to double down on my advertising to increase my exposure in the market. I borrowed $100,000 in cash from my finance company (the company that was financing my orders) to pay some of the advertising money up front. The balance of the advertising dollars the magazines gave me a line of credit for… about another $200,000. So, altogether, I had scheduled four months of advertising at about 75,000 per month (300k in total) in anticipation of delivering the product to the stores.
As it turned out, everything paid off. Or so I thought… I wrote a ton of business, opened up several hundred more locations than I expected and it looked like holiday was going to treat me very well.
Taking My Eye Off The Ball
That season we were shipping a lot of denim. Back in those days we had to make jean jackets to match every pair of jeans because that’s how everyone wore denim back then. We had some factories in China, and some in Korea that were making all of our products for the season. The vice-president of my finance company was overseeing the production of our tops and bottoms as he had relationships with the factories for many years.
To make a long story short, the jean tops arrived first and they looked great. My partner and I had ordered about 15,000 pieces of the tops that we sold for 40$ to stores (who then retailed them for 80$) so this represented $600,000 in revenue for our company for the season on that category of denim.
When the ‘matching’ denim bottoms came in however, the leg opening on the bottom of the jeans (where you put your feet through) were so small not even a kid could fit their feet through them. Some way, some how, there was a major screw-up.
Vested Interest in Both Success & Failure
The problem was that the vice-president had approved the production, so there was no recourse with the factory as he has signed off on it.
Here’s the key point… the vice-president of our finance company worked for the finance company, not our company. While he wouldn’t make money on a screwed up order, he wouldn’t lose any money either. Truth was, he had caught the mistake but did not want to get in trouble with the finance company for picking a bad factory since he worked for them not us… so he tried to dump the problem on us. And he did.
So here we were with 15,000 jeans that we could not use. These jeans were also 40$ wholesale so they had also a value of $600,000 just like the tops… But we were not only out $600,000 because now that the jean bottoms were of no use, the jean tops had no value either. The result? A 1.2 million dollar hit. My margins at the end of the day were around 30% so I was expecting to make $360,000 out of that $1.2 Million. I was planning to use that money to pay the $200,000 balance to the magazines and I would still have money left over to pay my other expenses and still take a nice profit at the end of the season. But that is not how things went down…
What went down was that lawsuits came flying, and the vice president of the finance company did not come clean with the President about the mistake and the finance company dropped us like a hot potato… and I was out of business in a day.
The Moral Of The Story
Only give decision-making power to someone who has a vested interest in both your success and failure. If their interest is with some other company other than your own, then that is the side where they will be making their decision from, not yours.
Have A Great Day!