CASE STUDY 02
How to Go Broke While Turning
a Profit
His income statement looked great. His bank account told a different story. This is what happens when a founder mistakes revenue for financial health.
The Situation
Walking the plant floor with this client was always energizing. The CEO had built something genuinely impressive: a manufacturer and online retailer of high-end children's apparel that had caught the attention of serious fashion buyers in New York. Demand was outpacing production. The income statement showed strong profitability. She had every reason to believe her ship had come in.
Then the coach noticed something on the racks lining the walls. Fabric, yards and yards of it, in dozens of colors and patterns. He asked if it was waiting to become product.
"No," the founder replied. "Those are remnants. Designs that didn't make it into production. Scrap, really."
"Do you know what it's worth?"
"Not exactly. But we're doing far too well to worry about a distraction like that."
The coach suggested she find a buyer for the scrap, even at pennies on the dollar. The founder waved it off. She had real profit dollars to chase.
“We are doing far too well
to worry about
a distraction like that.”
The Coaching Intervention
Less than a year later, the founder called. The company was in crisis. Profitable on paper. Out of cash.
The coach walked him through what had happened. The business was caught in a long cash conversion cycle — the time from purchasing raw materials to actually collecting revenue. Even though the company's credit card sales meant receivables came in quickly, the cycle was extended on the other end: significant fabric inventory had to be purchased and held well in advance of any design going to market. When designs failed to sell, that inventory didn't just sit — it silently consumed working capital.
Compounding this was the prototyping model itself. The founder was purchasing fabric in large quantities for prototypes that would never reach production. Each failed design left another stack of dollars on the rack. No one was counting those stacks, because the income statement — the document everyone was watching — didn't reveal them.
The P&L showed profitability because it recognized revenue when sales were made. It said nothing about the growing mass of cash tied up in unsellable inventory. That was a balance sheet story. And no one had been reading the balance sheet.
The Outcome
In this case, the outcome was painful. The founder ultimately determined that the financial hole was too deep to climb out of, and he closed the business. It is one of the stories Rich Tyson tells with genuine regret — because the intervention came too late. The coaching relationship hadn't been able to break through during the growth phase, when the founder's confidence in his own momentum made him unreachable.
The lesson is told here not as a triumph, but as a warning. Because this story ends the way many founder-operator stories end: not with a dramatic failure, but with a slow drain that was invisible until it was irreversible.
The PACER Principle
Control — the third stage of the PACER Action Model — is about measuring what actually matters. For founders managing fast-growing product businesses, that means looking past the income statement to the full picture: inventory levels, cash conversion cycle, working capital trends, and what the balance sheet is actually saying about the health of the business.
Profitability is a lagging indicator. Cash is the present tense. The business that controls both will survive growth. The one that only watches the first one often doesn't.