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How Some Firms Kept a Profitability Edge in the Recession

December 1, 2010

Al Bates, of Profit Planning Group and panelist on MDM's upcoming 2011 Economic Forecast webcast, says in an upcoming article for MDM Premium that as painful as it may be, now is the time to recession-proof your firm in anticipation of next time. To do this, companies need to look at how some distributors were able to maintain strong profit results relative to their peers during the recession.

Bates' firm prepares annual and monthly financial, compensation and operational benchmarking surveys for more than 100 trade associations. Bates writes that there are four profit drivers that often explain the differences between typical and high-profit results. In the "Great Recession," he says, two were at work and two were not.

  • Size of the firm by sales – He says that this had no calculable impact on results. Large firms in the recession had both economies and diseconomies of scale.
  • Sales growth – This is almost always a major factor in profit performance, he says. But in the recession this time around, everybody experienced large sales declines, with few exceptions. So sales growth did not play a role for high-profit firms.
  • Gross margin – He says the high-profit firms enjoyed a higher gross margin in almost every industry he covered.
  • Expense – Across virtually every industry, he says, industry expenses were lower. Most of this advantage was in payroll and interest.

The latter two differentiated typical firms from high-profit firms in the recession, he says. High-profit firms had 4 percent higher margins and 4 percent lower total expenses. He writes: "The high-profit firms were able to parlay small, but meaningful, advantages in margin and expenses into large advantages in ROA."

Hear Bates in the upcoming 2011 Economic Forecast webcast, where he will sit on a panel that includes two economists. His presentation will focus on how to, given the current and forecast economic situation, strengthen your company to boost profitability in the recovery. Register now or order the DVD.

Read Bates' article on this topic in the Dec. 10, 2010, issue of MDM Premium. Not a subscriber? Subscribe today to make sure you don't miss it.

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