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Watch out and avoid that financial trap

A long way from the days of stale pretzels and nachos with runny cheese, stadium concession stands today offer up fancy fare, no better exhibited than by the newest arena to host NBA games, the Barclays Center. From smoky brisket dogs to mango and cod tacos, to a namesake option called the Brooklyn Burger.

The burger, which is advertised as being made from the venue's own signature beef, actually is produced by a decades-old company that—despite generating tens of millions in revenue—has fallen into financial trouble.


Image Source | Getty Images

A. Stein Meat Products has been distributing meat and poultry to restaurants, shops and retailers in the New York area for more than 75 years. Last year, the company generated $50 million in sales, but it lost $400,000. This failure to stay in the black stems from universal mistakes that any company should avoid, according to Marcus Lemonis.

Lemonis, a turnaround specialist who's changed the fate of hundreds of businesses as the CEO of Camping World, now does the same for small businesses on CNBC's "The Profit." He scrutinizes A. Stein Meat while deciding whether or not to invest in it.

"What I found at Stein Meat is [they] have an insolvency problem. And what I mean by that is that their liabilities, what they owe to people, is significantly greater than their assets," he said.

A case of 'bright and shiny object syndrome'

Jumping into a new project or launching one without really thinking the entire process through can kill a business. Andrew Sherman, a partner at Jones Day who for more than two decades has provided legal and strategic advice to large and small companies, calls this problem the "bright and shiny object syndrome."

"It's when the entrepreneur or business leader suffers from a lack of focus by spending time, money, staff and resources on the next thing that excites them," he said. "And it manifests into a financial trap."

A. Stein made this very mistake when it branched off and invested $2 million in creating the Brooklyn Burger, instead of focusing on its main business and paying down its debt, according to Lemonis.

The company spends $400,000 marketing the burger, even though it only generates $1 million in sales annually, according to Lemonis.

Scrutinize cash flow in and out

Managing accounts receivable to accounts payable might sound simple, but it isn't always.

A. Stein Meat has nearly $4 million in receivables, of which more than a million dollars is more than five weeks old, with some of it due from companies that no longer exist or no longer buy the company's product.

"A lot of companies get into trouble when they're not collecting at rates they need to meet expenses. They augment the problem with financing, but the cost of capital gets too expense relative to cash flow," Sherman said.

And maintaining the proper working capital is necessary for financial success.

Manage margins properly

Knowing the cost to produce a product and the retail price at which that good will sell, or the margin, is vital to avoiding financial peril, Lemonis said.

He suggests cutting production costs by negotiating better terms with vendors. Always pay them on time and ask for a discount for doing so. Work with less of them, thus giving each more business, and in return negotiating a volume discount.

Perform thorough research when setting margins. Keep retail prices in-line with competitors in the market to retain customers, and go even further to create incentives for them to buy more.

Every penny counts

While it's much sexier to talk about increasing sales by 30 percent than it is to talk about slashing expenses, focusing on the former metrics can be detrimental.

Expense management, cutting costs and scrutinizing beyond the big line items of rent and payroll, to examine smaller items like utilities, fuel, supplies and travel expenses is essential to success, according to Lemonis.

"I've never believed that you can cut your way to a profit. But I do believe that you can throw your profits in the trash can if you're not focused on expenses," he said.

—By CNBC's Jeanine Ibrahim.

Tune into season two of "The Profit" on CNBC Prime, Tuesdays at 10 p.m. ET/PT.

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