Maximizing Profit in the Middle Market

Overview

The literal definition of margin in business is that it is an accounting metric that measures financial health. The profit margin is a ratio of profits earned to total sales over a defined period.  An internal operator of a business uses this statistic to determine financial and operational efficiency. She analyzes margin on a gross or a net basis, determining at different operating levels whether her employer is delivering goods or services economically. An outsider analyzes profit and loss statement similarly but also incorporates a broader industry analysis. This perspective can be helpful to management with determining what levers can be pulled to influence margins and what can be attributed to external market forces. When a middle market company falls under increasing scrutiny as a result of of declining or negative profits, leadership should consider bringing on an interim partner to review the business and to implement a business transformation.

Every industry will have specific dynamics impacting profitability, but in the end fixed and variable costs affect profitability whether the company in question is an airline or a metals fabricator. Understanding how each the key drivers of a business impact profitability is a crucial insight that must be present for any successful business transformation effort.

For middle market companies struggling with profitability challenges, the right interim leader, focused on driving a business transformation, is a key partner in this situation. Such a partner can serve as the catalyst a leadership team needs to foster understanding of the internal and external pressures that can lead to margin erosion while simultaneously leading the charge to develop a plan of attack to address them.

Change is Possible

Too often middle market companies view themselves as being subject to the whims of broader market forces, but even the smallest companies can develop and execute strategies to hit back at the persistent drivers of underperformance.

Helmuth von Moltke (the Elder) famously quipped: “No plan survives contact with the enemy.” This is certainly the case when seeking to execute a business transformation. Middle market change practitioners understand that versatility and the humility to seek out solutions that work, irrespective of authorship, are exactly the traits necessary to drive home a successful transformation initiative.

Identifying the drivers of weak or declining (or both) profitability requires a rigorous assessment of the present situation as well as the recent past. This process is focused on answering the questions 1) What is the situation now? 2) What is the near-term forecast? 3) What constraints is the company facing (financial, operational, supply chain, employee morale, etc.)? 4) What are the most promising avenues of change for the company? and 5) What is that impact of those change levers if the plan works?

Based on the understanding gained from a rigorous but expedited objective assessment, the focus will turn to implementation.

Value Creation Partnership

A faltering company presents a timing challenge, particularly in the middle market. The analogy of a melting ice cube is used frequently, and for good reason. Preventing value destruction relies not only on skill but also speed and focus. Turnaround specialists can implement a plan that focuses on driving profitability during good times and stopping cash bleed to stave insolvency during bad times. Affixing this financial management plan to a company dashboard can be part of a departing interim executive’s legacy.

Middle Market companies in distress are companies in dire need of partnership. Building the right advisory team, headed by a seasoned interim executive, gives shape and structure to a nascent business transformation.

Conclusion

Most companies will experience profit challenges at some point in their lifecycle. Persistent unprofitability, however, is a symptom of a larger problem, and often requires the expert help of an expert well versed in business transformation. The right partner will not only work in tandem with incumbent leadership to identify the root cause of a company’s profit challenges, but design and implement a comprehensive business transformation which will allow the company to address those persistent drags on performance and thereby enhance the level of profitability the company is capable of generating. For middle market companies struggling with profitability challenges, the right partner serves the role of teacher, mentor, and colleague, all in the service of creating value.

About the Author

Brett Ladendorf is a Managing Director at Abraxas Group, a boutique advisory firm focused on providing transformational leadership to middle market companies in transition.  He can be contacted at: brett@abraxasgp.com.