When the Worst-Case Scenario Actually Happens
Adam is President of illume, a training and consulting firm that helps companies find and hire top talent using theaward-winning Ionix Hiring System, which he developed in 2004. Adam is a noted recruiting industry expert and speaker. He can be reached at [email protected]
I started my business in 2004. By the middle of 2007, sales had grown to US$4 million a year. I had 21 employees, a great culture and was a leader in the emerging Recruitment Process Outsourcing (RPO) 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. But with long-term contracts in place at these two large accounts, naively, I wasn’t too concerned about losing either of them. I spent my time worrying about growth.
In October 2007, I lost my largest customer, which accounted for 40 percent of my company’s revenue. They had announced a merger with a rival. Before I could wrap my head around it, my second largest customer used a loophole in my contract to back out. In the span of 60 days, I had gone from a revenue run rate of US$4 million a year to an annual run rate of more than US$1 million. I had US$3.8 million a year to run the business. It was December 2007, and the proverbial “worst-case scenario” had just happened a week before Christmas. Faced with the prospect of a total personal financial meltdown, I came up with a path to get through this self-caused catastrophe.
It wasn’t pretty, but I didn’t have any choices. Decisions are easy when you’re backed into a corner— I had to stop the bleeding immediately. We went from 21 employees to 5, overnight. I cancelled every cancelable contract with non-core vendors, and I called my other vendors and explained my situation. Surprisingly, nobody pulled service. I learned what it means to have good suppliers.
I then 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 US$650,000 line of credit. Amazingly, they agreed to a 12-month forbearance. I learned that telling your bank the bad news is the right approach, no matter how much it stings.
My firm has since stabilized, and we’re doing well now, despite the near collapse. While it’s been a tough journey, I learned a lot about running a business in the process. For example, I learned that for most entrepreneurs, revenue growth is largely 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. Finally, I learned that I 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 about being an entrepreneur. I’m glad that “managing a liquidity crisis” is no longer on my list.