Filthy rich - the dangers of being profitable

I recently had an interesting experience with a new client. He bought a profitable business a few years ago that provided B2B and B2C services.

The business was very profitable and, as is usually the case under such circumstances he never bothered to analyse it too much.

Recently, due to changes brought about by the end of COVID, inflation and the rise in cost-of-living things were starting to slow down and the business became much less profitable.

This prompted him to approach me, and we started analysing the business.

By closely looking at each element – first the 2 markets (B2B and B2C), then specific service lines, and finally specific end customers we realised that the B2B segment was pulling the business down. The gross margin was so low that by completely eliminating it the business will actually be more profitable.

A closer look revealed that it makes sense to retain 3 profitable B2B clients, but the rest need to go. In fact, selling this part of the business to a competitor will generate enough cash to remove the need for invoice factoring, which is the biggest cost for the business after salaries.

This is not the first time I see this phenomenon – in fact I sued to work for a company that I called “filthy rich”. I maintained that it would have had much better results if it hasn’t been making so much money for years, as it would have enforced an overall review that had never been done.

Even when a business is doing well it is never a waste of time to thoroughly review it.