Where The Profits Are

Penguin Pools found financial success by trying something new: cutting costs and watching the books.

Closing a retail store and focusing on pool construction helped boost sales for Penguin Pools president Gary Cosden (right) and office manager Donna Cottrell.

Things were best in the hectic 1980s, when the company gained customers and sales grew each year. But in the early- to mid-1990s, work slowed down and cracks appeared in the company’s financial concrete.

“We wondered why we were sometimes running out of money,” says Donna Cottrell, Penguin Pools’ office manager. “Basically, as things slowed down and we had a chance to see what was going on with our company, we found problems.”

It wasn’t until Cottrell and Penguin Pools owner Gary Cosden attended a 1998 Aquatech seminar that the light came on, however. At the seminar, consultant Dan Andrews, president of Andrews Consulting in Saginaw, Mich., spoke the magic words: “More sales does not always mean greater profits.”

Then he gave an example: A retailer increased sales dollars by 7 percent, but found himself losing money faster than it came in. He hadn’t watched his operating expenses, and now needed more than $1.9 million in new sales just to break even.

That scenario sounded awfully familiar to Cottrell and Cosden, and Andrews’ profit vs. sales statement “made so much sense,” Cottrell says. “The busier you are, the more you’re running around, not watching what you’re doing — and possibly getting your business into a lot of trouble.” So Cosden hired Andrews as his financial consultant to help him plug his financial holes.

In just under a year, Andrews’ suggestions helped jack up company sales by 55 percent, and improved profits by 5 percent.

“The end of this year is when I really expect to see it,” Cosden says. “I know it’s made a huge difference, though. We can pay our bills on time, we’re not trying to stretch things out anymore. We do cash-flow projections every month, and we have a good idea of what’s coming in over several weeks.

“It takes a lot of the drama and anxiety out of our accounts receivables.”

"Penguin Pools never really knew where it stood in relation to true cost of goods sold, gross margin or cash flow. It was an accounting nightmare." — Dan Andrews Andrews Consulting Saginaw, Mich.

Penguin Pools had regarded its profit-and-loss statement as little more than a mandatory annual report for the Internal Revenue Service, according to Cottrell.

“We really didn’t know what it meant to our business operations,” she says. “It’s a tool to run your business — one that paints an accurate scenario of how a pool was built and what it cost you to build it.”

The company’s accounting ledger was also in disarray, largely because no one at the company knew how to use it. Cosden, who became Penguin Pools’ president when he took over the family business in 1996, remembers his surprise as he first cracked open the book. The poorly prepared ledger “didn’t tell us anything about how the business was doing,” he says.

“The accounting never made sense to me, and I don’t think it made sense to [my parents] either,” he says. “My mother controlled the funds, and she was very good at flying by the seat of her pants. When she left the business, it wasn’t doing too well, and we couldn’t understand why.”

The ledger wasn’t the company’s only problem. Penguin Pools also ate away at its own profits with poor project monitoring and chain-of-command confusion, according to Cottrell. She recalls cases of “several people working on the same thing, with most not getting to the end of it.”

In such a situation, a complaint about a new deck, for example, might never be resolved because everyone assumed that someone else was handling it.

Finding the real flaws
Cosden was aware of these big-picture problems (although perhaps not their severity). But it took Andrews’ guidance to track down the company’s specific structural problems, and to mount a defense against them. Among the fissures:

• Income statement line item accounts were in the wrong categories.

Some of the salaries paid to employees were classified as general and administrative expenses instead of cost of goods sold, for example. “The effect was that the cost-of-goods figures were underinflated and the expense figures overblown when compared to NSPI industry median figures,” Andrews says.

• The company recorded sales with a percentage-of-completion method but used an accrual-based method to record accounts receivable.

Under the percentage-of-completion system, Penguin Pools entered sales when a phase of the job was completed, a method that works if receivables are recorded the same way, Andrews says.

“But it’s very difficult to do with receivables, because prepayments, down payments and various draw schedules are not tied directly to work actually completed,” he explains. “As a result, [Penguin Pools] never really knew where [it] stood in relation to true cost of goods sold, gross margin or cash flow. It was an accounting nightmare.”

Andrews and Penguin are turning things around now by creating a financial program to track sales, cost of goods sold and margins for each job, all based on an accrual-based accounting system.

• On-the-job disarray.

Many businesses such as Penguin Pools suffer from the problem of “dangling loose ends” and unfinished tasks of subordinates, according to Andrews. Typically, this problem results from staff members who are so heavily involved in their own work that they fail to see how it impacts the company. Andrews calls this “sub-optimization.”

“It’s generally created by the lack of positive direction and supervision at a company,” he says. “Individuals will sometimes do things that appear to them to be in their own interest, even if the greater good demands something else.”

To correct this chain-of-command confusion — which was visible in Penguin Pools’ construction jobs — the company held several meetings at which its 15 employees were invited to express their concerns and needs to Andrews. The concerns were reviewed and prioritized based on what was best for the long-term growth of Penguin Pools.

Plans also call for Penguin Pools to institute a semiannual personnel evaluation program to match manager, employee and company goals, Andrews adds. The evaluations will be linked to a job description created specifically for each position in the company.

Reining in profit
Andrews next set about improving Penguin Pools’ profitability. The company set an immediate goal of raising profits by 5 percent and cutting costs by the same amount.

The first step: Boost income with a 5 percent, across-the-board price increase. This action actually drew little comment from customers — in fact, the company’s sales went up, Cosden says.

“Last year we did about $3.3 million in sales, and this year we have projected $5 million, which is more than a 50 percent increase [in business],” he says. “And our month-to-month projections for this year are right on the mark, so things are looking good.”

But lowering costs required a new philosophy, Cosden notes. Andrews offered a number of suggestions:

• Trim subcontracting costs.
“In our area, almost all of our pools are screen-enclosed, so aluminum contractors are a big part of what we do ... probably 25 percent of our total subcontracting costs. We probably pay $500,000 to $600,000 a year to these guys,” Cosden says.

“We decided which one we liked best of the [five] contractors we used, gave him all the work, and he gave us a better price on the service.”

• Shop around.
Penguin Pools now uses a spreadsheet program to compare product prices and find the best bargains. Then the company hunts for deals.

“For example, there are five local distributors out here who sell the same pumps, but don’t sell at the same prices. Before, if we needed six pumps, we’d buy all six from one distributor,” Cosden says. “Now we’ll buy one from distributor A, two from distributor B, another from C ... it just depends who has the best deals.”

• So long, retail.
For about 15 years, Penguin Pools was both a retail pool products store and a construction firm. But Andrews says that, after asking several questions about the company’s background and the skills of its sales, marketing and installation staff, it was clear that “the product and service mix strategy was wrong. The retail store was a distraction, not an asset.”

Cosden says the store “barely pulled its own weight” when competing with larger pool product retailers and neighborhood mega-marts such as Leslie’s, Pinch-A-Penny and K-Mart.

Andrews suggested that the company close the retail store and replace it with a well-appointed concrete display pool.

“We’re probably the only [builder] in this part of the country to have [a concrete display pool],” Cosden says. “It really sets us apart. A customer can now see, touch and feel what we’re talking about. We’re not just dealing with photographs.”