Rachel Elnaugh: How management consultants slayed a dragon

Rachel Elnaugh, 51, became an entrepreneur by chance. Having trained as an accountant with Arthur Andersen, she decided to work as a freelancer. One project that she worked on for a struggling company that offered "experience days", such as spa days and hot-air ballooning convinced her that she could do a better job herself. So in 1989, she decided to set up Red Letter Days. She used her own modest savings and also persuaded friends and family to put money into her company.

Her first advertising campaign fell flat, forcing her to return to freelancing to pay the bills. However, by a stroke of luck one of her clients introduced her to a marketing expert who recommended that she invest all her remaining funds in producing a brochure that could be inserted into national newspapers. This proved to be one of the best business decisions she ever made. As she recalls, almost as soon as the campaign went live, "the phones started ringing day and night". From being unable to find any customers, she suddenly had to take on extra staff to deal with the new business.

Red Letter Days went from strength to strength during the 1990s, with companies eager to use Elnaugh's company to provide events for their staff. Even the arrival of big-name competitors, such as Virgin, didn't slow her down, "since many large companies, like British Airways, didn't want to deal with them". By the end of the decade the company was making annual profits of more than £1m. Elnaugh herself had an increasingly high profile, winning a string of awards, as well as a regular slot as one of the original judges on the BBC's Dragons'Den TV series. However, she says, the best perk of all was being invited, along with her five sons, to try out the services of events companies who were eager to get included in her company's catalogue.

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Elnaugh admits that this rapid success sowed the seeds of the firm's eventual downfall. Convinced that she had "the Midas touch", she embarked on a big expansion that involved hiring management consultants, who insisted on imposing added bureaucracy and layers of management. Not only did this "destroy the magic that had made Red Letter Days great", but it also led to a rush for growth, involving an expensive TV advertising campaign. Revenue rose rapidly, but the spending required to drive sales higher put huge pressure on cash flow.

Matters came to a head when Elnaugh's banker, Barclays, insisted on putting all the credit-card revenue from voucher sales into a bonded account that Red Letter Days was unable to access. Barclays argued that the funds represented payment for services not yet received, and so had to be kept in reserve to pay suppliers, rather than used as working capital. Elnaugh points out that they even froze money from vouchers that had expired (and so couldn't be used).

She desperately fought to keep the business alive, knowing that if she could solve its cash-flow problems, the future would be secure. It looked as though she had found the solution in a joint venture with another firm. But just before the deal was about to be signed, they pulled out, she says. Red Letter Days went into administration, at which point the firm tried to buy it at a knockdown price, something that she is proud to have prevented. The company was bought by fellow "Dragons" Peter Jones and Theo Paphitis instead.

Undaunted by the demise of her company, Elnaugh wrote a book based on her experiences: Business Nightmares: When Entrepreneurs Hit Crisis Point. Her latest project is Source TV, a marketing platform for life coaches. Her advice to entrepreneurs? "Start as small as you can" and "be prepared to modify your business plan in light of developments".