As a middle-market business owner or executive, you know how difficult it can be to react to changes in the marketplace. Often, the hard part is knowing where to start and how to prioritize your time in terms of new business opportunities, existing sales and corrective actions. There’s a lot of advice floating around — and more business self-help books than is reasonable — so how do you cut through the noise?
Our firm, Quadrillion Partners, invests in businesses in complex situations where we can add real value to a company’s strategy, operations and financial management. We don’t focus on companies that are operating at the top of their industry and appear to have all of their issues solved. Rather, we focus methodically on one simple thing: making companies stronger and more viable than when we bought them. We believe that improving performance sustainability is hard. Unlike other private equity investors, we work with middle-market business owners and their management teams, partnering side-by-side, to improve profitability and assist in making smarter and better decisions. As former operators and advisors, we know the difference between a “check-in” during a board meeting and working on an initiative day in and day out.
Embracing economic turbulence
In fact, we engage with business owners every day to discuss their plans for their businesses, their personal goals, and their fears about the economy, increased regulation, new healthcare laws, the Euro crisis, and a host of others concerns. What we’ve learned over time is that navigating economic turbulence is more about focusing on the fundamentals of your business and knowing what your company excels at than it is about dramatic moves into new markets and regions.
We love turbulence because it causes business owners to understand the fundamentals of their businesses and make trade-offs that can be managed for future profits.
Wondering how? Here are five tips to help you understand your business’s fundamentals and competencies:
- Explicitly define what makes your business different. Your front-line customers and team already know what sets your business apart from competitors. Listen to them and use that knowledge in marketing communications to quickly improve revenue and profits. Companies that do things differently often can charge a premium for their products and services.
- Understand your critical cost and revenue levers. Intuitively, most business owners have “rules of thumb” and other criteria in their heads when they size up a new customer relationship, an expansion of a facility, or a new product line. Profitability is no different — know the drivers of profit and develop simple criteria by which you can evaluate whether a particular decision will improve your cash flow or reduce it. In times of turbulence, your understanding of each driver will help you navigate quickly and creatively through tough times.
- Set simple goals and measure them constantly. Measurements are critically important because they paint a target for teams to try to hit and they motivate behaviors. Setting a profitability target — whether based on Earnings Before Interest Taxes, Depreciation and Amortization (EBITDA), free cash flow (FCF), net income or some other measure — signals to your team that you care about the goal and expect everyone to work toward it.
- Understand your inefficiencies. It used to be that activity-based costing (ABC) was the domain of MBAs, expensive consultants or accountants. Today, business owners can learn how to execute ABC studies via the Web: Accounting Coach and Proformative are good places to start. Next, take those results and allocate costs differently than what you see in your standard P&L. Why does this matter? ABC allocations often give better insights into where you make money and lose money, particularly if you look at variability over time in key activities. When layered in with process model, you’ll find weak spots and areas to address that will help you navigate trouble spots.
- Know how you stack up to your competition. Benchmark your costs, processes and pricing. While there is a large cottage industry dedicated to benchmarking, business owners can leverage their relationships to gather new data and to understand how they stack up. Moreover, benchmarking should also include your internal best practices and how success in one office, region, customer, etc. can be replicated elsewhere.