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John Fernsell, a former stock broker, is pursuing his business idea of a high-end woolen ski clothes. After a significant personal investment and five years of operations, the business is demonstrating an impressive growth and sales of over $1 million. However, despite the growth rate, the business is not yet profitable, partially due to lack of cash and a turnover that is much higher than what is usually common in the fashion industry. As a result, John is considering developing a summer clothing line - such a line would significantly increase the business turnover, thus reducing excess interest expenses and achieving cash flow stability and profitability. Although John highly believes in the idea of a summer line, he should approach it very carefully. His business cannot incur further costs and may go bankrupt in case the summer line fails. Instead, John strategy should focus on improving his profitability, and eventually his cash flow, through price increase, cost reductions achieved through economies of scale, and cheaper financial resources obtained through external investors. To reduce the risk, John should use his existing customer base to test his notion of a summer line before investing in extending his operations.
To make the discussion more material, Exhibit I attempts to depict Ibex income statement for years 2001 and 2002. It is evident that interest expenses make roughly 7.5% of costs and reducing these costs is highly important for the business profitability. However, is a new risky summer line the only way to achieve a more stable cash flow and profitability? Analysis of the case reveals that John business has several key strengths that may allow it to reach profitability without launching ...