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Sustainable Success: A Framework for Optimizing Profit
| PROFITABILITY AND EFFICIENCY
All management teams want to position their company to weather the ups and downs of a business cycle without compromising its ability to thrive. The key to that goal is optimizing profit targets. While all organizations generally apply some effort to profit optimization initiatives, I’ve found that when those attempts fall short, it’s because they lack a strong framework for establishing the right targets or a strategy for executing on their goals.
Establishing this kind of framework is all the more important when economic trends are gloomy. A potential recession can cast doubt on expected revenue growth and cash flows. Inflationary pressures push wages, material costs, and operating expenses upward, eroding profitability unless they’re swiftly countered with price increases or other offsetting levers. Higher interest rates tighten the screws further, negatively impacting return on invested capital, especially for businesses with unhedged floating-rate debt obligations.
That doesn’t mean it’s time to panic. Challenging times present an opportunity for leadership to head off financial distress by reviewing company processes, vendor agreements, product portfolios, pricing, and other factors to streamline operations and craft strategies that deliver optimal margins while enabling the business to achieve key objectives. Having resources allocated as efficiently as possible allows management to move quickly and confidently in the face of headwinds. And if a recession doesn’t materialize, or other trends improve, your company will be more advantageously positioned to capitalize on new growth investments.
In this article, I outline a four-step strategic process businesses can use to successfully define and implement profitability optimization initiatives in the face of steep inflation and high interest rates. I focus on EBITDA margins in order to eliminate the noncash impact of