Ask the Small Biz Adviser By Stephen Windhaus • Bankrate.com

If a move to a new building coincides with a decline in profit, re-examine the cost of goods sold.

Dear Small Biz Adviser
I bought into a partnership of an auto upholstery business, which has been going for 20 years. We relocated our business just across the street to a much bigger shop to aid in the growth and expansion, but ever since then, it seems that the business has been slowly going downhill.

We have tried to understand the problem -- from what kind of help we had to the presentation of the building -- and we are about to pull our hair out. What do you recommend? We have a current offering of an even larger building centered in our downtown with even cheaper rent. What should we do?
Sincerely,
Debra

Dear Debra:
It would be too easy to tell you the decline is due directly to the move. But that can't be done. In the first place, you have not indicated the exact nature of the decline. Is it in total sales, gross margin, number of customers, average sale per customer, reduced net income or something else? Absent that very important detail, I can only give you a list of directions to take in attempting to find the answer:

• If there is a decline in overall sales, then the new location may be a culprit, but not necessarily the only culprit. How many clients are repeat customers? Of those repeat customers, have you asked them if changing locations across the street has made it easier or more difficult to return?
• If there is a decline in overall sales, have you also changed your advertising strategy? Why change something if it works?
• If gross margin has declined, has there been an increase in the cost of inventory or any other expense directly related to sales? Are employees paid by the job? If so, then their wages are a direct cost of sales and should be deducted from gross sales along with the cost of parts to determine the gross margin. That is part of the reason I ask if gross margin has declined. Another way to pose the question is to ask if employees' wages have risen. If net profit is to remain the same, increased wages need to result in increased sales.

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• Have you hired more employees? If so, do they contribute directly to sales activities? Do they perform upholstery work, write up sales tickets, collect payment or directly promote the business? Are those expenses directly resulting in increased sales?
• Having moved into a new facility and even considering movement to third facility clearly indicates you lease the site. Given the new, second site is larger, I am led to believe you are incurring a higher overhead cost which results in less net profit if sales have not increased. The move to a larger facility and the attendant cost increase must be justified by increased sales.
• You refer to the consummation of a partnership prior to moving into the new facility. Were you an employee prior to the new business agreement? Were you earning wages or a salary prior to the new agreement? Expanding individual ownership increases the demand for more gross margin, at the very minimum. If your compensation, be it wage, salary and/or dividend, is a new financial burden to the company, then sales must increase to meet that demand. Or else net profit will decline.

I do not have sufficient information to securely point an accusing finger in any one direction. But there are two issues I am trying to emphasize:

1. Never incur a new expense unless you are certain it will directly impact increased sales to meet that new expense and add more profit to the business.
2. Never change the method of conducting business if time and circumstances have proven it to be the best way to make and improve on net profit.

I suspect the former issue may direct you to the source of your problems. On the other hand, there may not have been sufficient market research conducted to justify moving to the larger, more expensive building. You need to analyze this problem from both perspectives.

I wish you well.

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-- Posted: Aug. 8, 2000