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Case Study - Simply Green Biofuels
Lack of Profitability
Customers and Revenue
By September 2011, the company had 1,500 heating oil customers and was delivering about a million gallons a year of biodiesel. Customers were concentrated in the seacoast of New Hampshire into southern Maine and down into northeastern Massachusetts.
Simply Green’s market share within the heating oil industry was 10 percent to 12 percent and had grown fast, especially given the traditional customer to dealer relationship and that their product was a new one.
Total revenue at the end of 2011 was more than $4 million. Of the total revenue, 60 percent to 70 percent was BioHeat and 20 percent to 30 percent biodiesel and the balance was the congreenience store (see details as follows).
Volatile Oil Prices and Changing Economic Conditions
By many measures, Simply Green could be characterized as successful. Then why, after four years, was it still operating in the red-that is, losing money? One factor was volatile oil prices and changing overall economic conditions.
For example, in its second year (winter of 2008) the start-up company was negatively impacted by the unanticipated $4 a gallon oil. As is standard industry practice, Simply Green prebought ahead of the peak heating season from their wholesale fuel suppliers for a select percentage of their customers that wanted to prebuy their fuel.
Simply Green was contractually obligated to pick up those gallons at the fixed price. Historically, there would be some fluctuation in those prices versus what the retail spot pricing would be. But never was there such an exaggerated difference where a customer who had prebought would then call another company to get fuel from them because the market price was so much lower than the prebuy price they had locked in.
Loss of Customers
Many Simply Green customers locked the price at $4.50 a gallon, and then that winter, heating oil plummeted to $2. Simply Green could not force customers to take the fuel and they had not required their customers to commit to buying a minimum amount of fuel.
Some Simply Green customers may have went to another oil dealer to get fuel at its market price, some may have just turned their heat way down and put on a sweater to reduce their oil consumption, and some people may have burned more wood.
The loss between what Simply Green had paid for the peak price oil and what it could eventually sell ended up being more than $300,000.
This forced Andrew Kellar to take on two silent business partners. The partners took a 30 percent equity position in the company and contributed $150,000 to the business. Taking on the partners provided Simply Green with the financial resources that Andrew did not have and did not have access to. The business partners, however, did not have as much of an interest as Andrew in community engagement and the partners shifted the focus more toward the single bottom line of profitability.
The partners had a commitment to the environment and were conscientious of how they operated in the community; however, these were not as much in the forefront of their efforts according to Andrew Kellar. As Andrew describes it:
“I get that in businesses sometimes you’re forced to get to a place where you really have to focus more on the main bottom line, until you can get to a place where you can have the luxury of expanding that.”
Equity Interest in a Business
An equity interest is an ownership interest in a business entity. Shareholders in a publically traded company have equity interest; their purchase of shares of stock in the corporation gives them a share of the ownership of the business.
Private equity is a broad term that refers to any type of equity investment in an asset in which the equity is not freely tradable on a public stock market. Categories of private equity investment include business partnership investments, leveraged buyouts, venture capital, and angel investing.
Where Andrew Went Wrong
Andrew Kellar’s priority to always do the right thing for the environment and people had implications. In particular Andrew neglected his need for capital and adequate cash resources (cash flow).
He did not adequately anticipate the implications of different potential scenarios beyond his control, such as what if oil went to $4 and then down to $2 or by growing to one thousand customers, how was he going to manage $300,000 in accounts receivable over thirty days?
He did not think through these potential scenarios, and he did not have the adequate financial resources on hand when these happened. What he needed to have done was in the early stages have a detailed business plan with “what ifs” for different scenarios and identify risks in his operations.
Working Capital and Keeping the Business Ongoing
Working capital measures how much in liquid (readily available) financial assets an organization has available to fund and build its operation. The number can be positive or negative, depending on how much the organization is growing relative to revenue collection and the debt the organization is carrying.
In general, companies that have a lot of working capital will be more successful since they can expand and improve their operations. Companies with negative working capital may lack the funds necessary for growth.
For Simply Green and any other company in the energy business, price volatility is one of the biggest risks. This is a particularly significant challenge for start-up and small companies with limited financial resources and little operating reserves.
This challenge also has a potential upside for Simply Green and the renewable energy and energy efficiency industries.
For example, as fuel prices were rising rapidly again in the early spring of 2011, this again raised awareness about alternative energy, which can be a positive factor for the biofuel industry. But the volatility-the up and down of oil prices-as was experienced in 2008 and again in 2011, makes it a challenging operating environment for new energy companies trying to change the industry and customer preferences.
The final challenge was personal for the entrepreneur. Life became “too crazy,” as Andrew put it, and it became increasingly difficult to satisfy both his personal and professional lives. They were no longer aligned for Andrew.
The craziness of being an entrepreneur for Andrew included being responsible for 1,500 customers who could call at any time and responsible for drivers on the road twenty hours out of the day delivering customers their fuel. He had taken only one vacation during the four years of his business start-up. And even on the very occasional days off, there was always something that had to be taken care of.
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