How can you recognize an economic crisis?
Corporate crises often occur insidiously. When such creeping ones become apparent, they have already taken root “under the surface”. Therefore, pay attention to whether your organization is still well embedded in its economic environment. Have key characteristics of your target markets changed? Does your corporate strategy still apply? Do your organization’s services still meet natural demand, or do you increasingly need to “push” your services into the market with significant sales effort? Do you recognize any structural problems in your organization?
A simple and effective remedy: include in your operative controlling the incoming orders with their calculated contribution margins and keep track of the development of the order backlog and its contribution margins as an essential controlling tool to see an economic crisis coming early. Take warning signs that emerge seriously and initiate effective measures immediately.
How is revenue generated?
From gross revenues to net revenues
Every source of financial revenue is sales of services that result in gross revenue (quantity multiplied by price), the so-called top line. By “gross” we mean revenue before discounts and bonuses to customers. If we subtract discounts and bonuses from gross sales revenue, we get the net sales revenue that the organization can work with.
Look specifically for opportunities to increase sales and revenue. Depending on the market and company situation, it may make good business sense to accept orders at prices that only partially cover overhead costs as long as all variable costs are covered. Such orders provide additional contribution margins and help the organization. However, in the automotive industry and in business with discounters, there is a risk that such orders will creep up on much of your capacity. What seems tempting at first unfolds a high dependency on a few customers and prevents profitability. It is not uncommon for such customers to even reserve the right to supply the material, effectively turning you into a transparent contract manufacturer.
Gross profit
After deducting the material expenses, we arrive at the gross profit, the first important earnings figure. The gross profit is available to your organization to cover the costs of all economic activities. The main levers for gross profit are sales volume, net revenues and material expenses. These levers are moved in sales and purchasing. The greater the sales volume and the more standardized the market services are, the greater will be your influence on the procurement prices for raw materials, input materials or merchandise. Promising success is a holistic yield increase.
Company yield and yield terms
On the way from gross profit to company profit, it is all about efficient management. Always question what activities you really need to run your business. You will be amazed at the cost reduction opportunities you keep discovering. Don’t take anything for granted; instead, put every cost item to the test. However, be careful not to create bottlenecks in the process by over-committing to savings. Operational circularity usually has a greater impact on revenue than the last personnel or non-personnel cost savings. This is because processes are also a cost item, even though they do not show up in the BWA. Poorly coordinated processes can lead to multiple work, waiting times, higher inventory levels, poor delivery performance and demotivation of the workforce, so they definitely result in cost items.
If you subtract all operating costs, including depreciation on investments and financing costs, from gross profit, you arrive at an important earnings figure, operating profit. This is the “honest” earnings figure. However, it is difficult to compare differently financed businesses with operating income, which is what institutional investors (private equity, family offices) like to do. Companies that have a high equity ratio have lower financing costs than companies that are highly leveraged. In addition, companies that invest heavily have higher depreciation and amortization than companies that invest little. Finally, companies differ with respect to the taxes that weigh on earnings. The tax burden can be influenced by the past, but also depends on the company’s name, the shareholder sphere and special effects. To neutralize these three effects in the earnings figure, EBITDA is used (Earnings before Interest, Taxes, Depreciation and Amortization). At EBITDA level, the operating performance of companies can be assessed independently of their financing, their current tax situation and their investment intensity.
An intermediate level is EBIT (earnings before interest and taxes), which is also widely used.
Measures to increase earnings in the economic crisis
In an economic crisis, it is important to move suitable levers quickly in order to rapidly expand earnings and secure liquidity. The economic development can hardly be influenced. Measures to increase sales and revenue should be identified and initiated, but often the most effective lever lies in Adjusting costs to economic developments. Cutting costs without locking in the future as a result is a definitive challenge during an economic downturn. Be aware, however, that your organization will not even reach the medium-term future if it does not survive the current crisis. Therefore, approach restructuring measures with appropriate determination. Check whether your commercial banks offer Financing to implement necessary restructuring measures. Financial bridging of an economic crisis without implementing restructuring measures is usually not financed by commercial banks because it merely delays the end of the company, but in most cases does not avoid it.