In the first half of 2016, Los Angeles area-based family furniture business Pacific Hospitality Design (PHDesign) was experiencing a slew of financial setbacks, its owners said on the latest episode of CNBC's "The Profit."
Sales had dropped, orders were delayed, the company could barely make payroll and liabilities had reached $406,000 — forcing co-owner Ana Martinez to put in $75,000 of her and her husband's own money.
The nearly 40-year-old furniture manufacturing company, which catered mainly to the commercial hospitality space, made two common business mistakes that contributed to the slump.
Low sales prices offered to customers and an inefficient use of business space debilitated the company and prevented it from reaching the profits needed to securely land the company another 40 years into the future, said turnaround king and "The Profit" host Marcus Lemonis on the show.
"When those things exist and business is great, you can just skim by, but when business drops, it's like putting a noose around your neck. There is no chance of survival," Lemonis said.
To increase gross profits, Lemonis encouraged Martinez and her dad, Gilbert Martinez, also a co-owner of the company, to raise the quotes they offered to their clients.
As it stood, sales margins were frequently in the 20 percent range, a byproduct of a fiercely competitive market where furniture manufacturers like PHDesign underbid their prices to garner market share.
"Furniture margins in this business need to be north of 55 percent — not only to make a product but to leave yourself some gross profit to deal with quality control issues and damage," Lemonis said.
"If they were getting a 57 percent margin on $2.8 million of sales, they'd actually be generating $1.6 million in gross profit instead of their 28 percent margin, which generates less than $800,000 in gross profit," he said.
In addition to increasing the pricing of PHDesign furniture, Lemonis encouraged the Martinez duo to redesign the layout of their store and create a more streamlined production process.
As it stood, there was no one designated specifically to monitor furniture before it left the store, meaning that when big corporate clients like The Coffee Bean, MGM and Caesars Palace found faults in their products, PHDesign would be forced to spend more money fixing the problem, ultimately decreasing margins.
There was also no work order status on items, so it was nearly impossible to track where items were in the production cycle. Items could easily go missing or be misplaced, forcing more money and time to be allocated to the production process.
And on a physical level, the 6,000-square-foot warehouse was piled with furniture that had been laying fallow for months at a time, creating clutter and glut.
Lemonis contributed $150,000, half of his $300,000 investment in the business, to remodel the business and implement a production process.
The team got rid of the old showroom and transformed it into a design center to be used by employees and clients. They cleared away unused items to make more space, and they created a network of workstations, including a framing department, a finishing department, an upholstery department and a staining, topcoat and quality-control department.
"With the new pricing process in place and new efficiency in place, my expectation is that we pick up at a minimum 20 points of margin, or $560,000 in gross profit," Lemonis said.