Can Your Business Survive a Volatile Market?

Market volatility can expose weaknesses that remain hidden during periods of easy growth. Inflation, changing consumer behavior, higher borrowing costs, technology disruption, and workforce shifts all make it harder for business owners to predict what comes next.

In a recent episode of Profitability Playbook: The Simple Numbers Podcast, hosts Brandon Gray and Mike Maxson discuss how, in this environment, profitability alone does not provide a complete picture of business health. Owners also need to evaluate whether their results are consistent, whether the company has sufficient capital, and whether the business generates an appropriate return on the money invested.

Evaluate Performance Over Time

A business may report strong profits one year and experience a significant decline the next. This pattern can create uncertainty for owners, potential buyers, lenders, and successors because a single high-performing year does not demonstrate that the company can produce sustainable results.

To assess volatility, review profitability across several years. Look for recurring peaks and declines, then identify what caused them. External market conditions may contribute, but internal decisions can also create instability. Excess hiring, inconsistent execution, complacency, and delayed responses to market changes can weaken performance.

Consistent results help establish predictability. They can also strengthen the company’s value when the owner is preparing to sell the business or transfer it to the next generation.

Control Labor Creep

Labor creep is one common source of self-inflicted volatility. When a company is performing well, leaders may begin adding employees to address inconveniences or improve individual parts of the operation. Over time, those incremental hires can materially increase payroll.

If revenue slows after the company expands its workforce, profitability may fall quickly. Before authorizing a new position, review current workflows, employee capacity, and operating processes. Determine whether the need requires another employee or could be addressed through better systems, clearer responsibilities, or greater efficiency.

Disciplined hiring does not mean avoiding necessary investments in talent. It means requiring financial and operational support for each hiring decision, even when the company has room in its salary budget.

Maintain the Habits Behind Strong Results

Sustained success also depends on consistent execution. When sales remain strong for an extended period, teams can become less focused on the routine activities that originally produced those results.

The most effective operating practices are often simple enough to overlook. Client meetings, prospect follow-ups, disciplined hiring reviews, and regular financial analysis may appear routine, but their cumulative effect supports long-term performance. Businesses should continue these practices during strong periods.

Measure Return on Invested Capital

Return on invested capital helps owners assess whether the business is generating enough profit relative to the equity required to operate it. The Simple Numbers framework uses a 50% return as its benchmark.

Capital-intensive companies may face a narrower margin for error because vehicles, equipment, facilities, inventory, and accounts receivable require more cash to support operations.

Owners can begin by identifying the periods when the company generated its strongest return. Reviewing the corresponding balance sheet and profit-and-loss statement can reveal the staffing levels, cash position, debt, margins, and operating practices that support those results.

Build a More Predictable Business

Healthy businesses combine growth, profitability, sufficient capital, strong returns, and consistent performance. The framework discussed in the podcast includes targets of at least 10% growth, at least 15% profit relative to gross margin, two months of core capital, trade capital below the profit percentage, and at least a 50% return on invested capital.

Market conditions will continue to change. Business owners can improve resilience by monitoring these measures, addressing weaknesses early, and maintaining disciplined operating practices through both strong and challenging periods.

If you would like to learn more about building sustainable profitability and strengthening your company’s financial health, contact us.