Strategic Advice Reacting to changes in profitability

Some signs of profitability challenges are obvious—declining profit margins among established stage companies, for example. Even in such cases, a clear signal warrants in-depth examination to help you determine if those shrinking margins are the result of rising costs, falling sales, inadequate pricing, or some combination of factors. The numbers alone won’t always tell the whole story, but they can help you and your Truist banking team identify changes in sales trends or operations you need to understand.

An irregular cash flow pattern is one example of an early warning sign. Sometimes irregularity is to be expected, such as for early-stage businesses still developing sales patterns or for companies that are project-based or seasonal. But when established patterns are disrupted, perhaps with more frequent cash shortages or extended periods of negative cash flow, there may be underlying issues.

Your relationship manager can help you interpret such metrics, and it may be helpful to conduct a sensitivity analysis even when you don’t suspect a problem. A sensitivity analysis is a modeling tool used to predict the potential impacts of changing variables, such as the cost of goods sold, wages, and debt payments, on a company’s profit margin. That may reveal weaknesses or issues that haven’t yet made a material impact.

Some threats to profitability come from external factors, which could include broad economic conditions or industry-specific trends that could lead to a dramatic market shift. For example, companies in the building products industry have had to wrestle with issues including supply chain disruptions, volatile material costs, and labor shortages in recent years.

An advantage of Truist’s Business Lifecycle Advisory approach is that your relationship manager has access to specific industry expertise that can help identify issues early and help you and your team understand whether you’re dealing with something internal to your company or a broader external threat. That knowledge of industry trends and best practices helps Truist clients understand where they may have fallen behind in technology, operational efficiencies, or another factor that demands attention.

When threats to your profitability arise, your response should consider both short-term and long-term priorities. In the short term, the problem has to be identified, understood, and neutralized to whatever extent is possible. In the longer term, the strategy should, at minimum, align with your company’s established strategic goals or, if possible, update those strategies to help your business be better prepared to handle future challenges.

Because Truist starts every relationship by developing a deep understanding of your goals, strengths, and challenges, your relationship manager has unique insight into the specific financial solutions that can align your short-term needs with your long-term goals. They can also help determine the cost of such efforts, as well as the potential return on investment and impact on financial components such as cash flow.

Take the potential impact of modernizing payment processes. In the short term, the efficiency of moving to a less labor-intensive automated accounts receivable procedure has an immediate impact on the bottom line, not just in payroll costs but also potentially in speed and accuracy of collections. But if your company can then redeploy employees into revenue-generating roles, the benefit of that shift will amplify over time.

For Truist client Palm Beach Cast Stone, a 30-year-old maker of luxury stone products with ambitions for global expansion, market fluctuations and uncertainty were worrisome challenges. The necessary investments would be expensive and a potential drag on earnings if the expansion were to take longer than expected.

Owner William Thayer worked with his Truist relationship manager on creative financing solutions for equipment and a larger facility that would allow him to diversify and expand his existing client base. That strategy and the approach to it helped decrease the chance that a near-term market shift or customer loss would have a major impact on his business while also strengthening the company’s finances to support geographic growth.

Conversations with your Truist relationship manager can also help you identify the impact of your position within the business lifecycle on any profitability threats. Established firms may have different advantages and challenges compared to earlier-stage growth companies, for example.

While circumstances vary, in general the more established a company is when a profitability challenge arises, the more resources that company will be able to use in its response. At the same time, however, an early or growth stage company might have more flexibility to implement creative strategies efficiently.

Consider how a legacy technology powerhouse like Microsoft has dealt with the rise of artificial intelligence and the many competitive threats it creates, compared to a younger, growth-stage company like Zoom. Microsoft’s massive balance sheet allowed it to invest more than $13 billion into OpenAI to jump-start its ability to integrate AI across its product platforms and also make plans to spend $80 billion in fiscal 2025 constructing data centers to handle AI processing.^{Disclosure 1}

Zoom, a relative startup by comparison, is also betting heavily on AI but is using what it calls a “federated” approach, picking and choosing from among available models to avoid spending on more costly methodologies for tasks that don’t require as much computing power.^{Disclosure 2}

Truist’s Business Lifecycle Advisory process offers solutions to challenges designed with the lifecycle stage in mind. For example, an early stage business in need of a simple way to start accepting digital payments can use the Zelle platform and QR codes to get paid by customers. Established firms with more complex needs may benefit more from a full suite of digital services including Real-Time Payments, same-day automated clearing house (ACH) transactions, and more. As clients outgrow their initial solutions, their Truist advisors are able to guide them into tools and solutions appropriate for the current stage.

Profitability challenges take many forms and may require creative responses. With the help of the financial resources Truist’s one team approach provides, companies have the ability to not just understand a threat, but also address it effectively.