Seasoned entrepreneurs and executives constantly push to maximize or maintain profitable growth in value, in any economy. These strategies help you take advantage of up cycles, weather recessions, and achieve your growth and value goals.
The economy is relatively healthy, but history has taught us that profitable growth cycles don’t last forever. Knowing that there is a cyclical pattern in many markets, seasoned owners and executives discover how to take advantage of business cycles to create a path of continuous growth and increase profitability.
Here are five critical action items for mid-market companies that will help you maintain profitable growth in any economy:
1- Develop a strategic plan.
Businesses that endure the ups and downs of the economy share several qualities that consistently create value. These companies offer attractive products and services, both from a strategic and customer perspective.
They have strong equity positions and strong balance sheets. They maintain a flexible cost structure. And they plan ahead to identify new opportunities and can quickly deploy resources to take advantage of those opportunities.
2- Grow the customer base.
Take a financial stress test
A key planning tool is an integrated, assumption-based financial model that includes an expected income statement, a balance sheet, cash flows and, where appropriate, the calculation of the debt base.
This model can be used to stress test your business performance if a future recession has the same impact on total revenue and profit margins as past recessions.
Run different scenarios on the model to see the effects of changes on fixed and variable costs, revenues, prices, margins, and other parameters. Ask yourself this: How would the company fare if history repeated itself? Use the answers to prepare now for the next recession.
Unfortunately, we don’t see that many middle-market companies doing these types of financial modeling, especially considering that it doesn’t require a large investment or time. Remember, you can keep it at a high level and still get useful information.
Dig deep for growth opportunities
If your stress test results are positive, it will be one less problem to think about. Still, look for less obvious problems below the surface. Examine the ecosystem around you.
Who are your key suppliers and customers? What are your most profitable products? How does this compare to your competitors? How will the health of certain customers, suppliers and competitors affect your business in a recession? Most importantly, what threats and opportunities can you discern?
Smart companies continue to innovate while others duck defensively. On the talent side, smart people working for struggling companies often worry and look for alternatives. Again, instead of cutting down on talent, go on the offensive to invest. At the same time, involve your talent in discussions about the future of the company and your future with the company, so as not to lose trained personnel.