Roundtable focused on owner-managed businesses (OMB) hears how management teams are adapting to margin pressures
Retaining strong cash reserves and maintaining margin discipline are the two key tools businesses need to protect themselves against shocks in an increasingly uncertain economy.
This was one of the messages delivered at a special Scotsman Insider roundtable event hosted by law firm Burness Paull in their Glasgow offices this week, the third in a series covering owner-managed businesses.
The first two sessions of the day tackled scaling and funding barriers, and this time the panel turned to the bottom line and looked at where margin comes under pressure, how to relieve it, how it creates value and how it builds resilience.
Tony Gillham, audit partner at CT, told the latest Scotsman Insider Owner Managed Business roundtable about a client with exceptional margins.
The company concerned had to halt all purchasing and run down its stock, because it had neglected its cash forecasting.
Tony told the table: “It’s that old adage of turnover is vanity, profit is sanity, cash is king.
“I think it’s the cash is king bit that really starts to drill down on the cash forecasting.
“So I think those margin pressures have meant that cash flow forecasts, for us as auditors, are more important than are you going to make a profit. Because you might make a profit by the end of the year but, in month-six, you’re going to run out of cash.”
Businesses have faced no end of macroeconomic shocks over the past decade with Brexit, Covid and inflation all impacting on the bottom line.
Paul Scullion, head of corporate finance at Burness Paull, said that volatility, combined with tax changes, is making owners rethink passing their businesses to the next generation.
“There’s been no shortage of uncertainties in the last ten, 15 years,” he said.
“You’ve had the global financial crash, you’ve had Brexit, you’ve had the Scottish independence referendum, you’ve had wars in Ukraine, wars in the Middle East, cost of living.
“So we certainly hear people talk about, consider, plan for exit, mainly for the purposes of de-risking things for themselves.”
Owners cannot control inflation or geopolitics but they can control what comes in and what goes out if they understand what drives each.
Richard Pugh, investor at BGF, reads a business from the top down.
“Is growth coming from volume or price? What are the underlying gross margins, and then what does the overhead look like? he said.
“Low gross margins can be a sign there isn’t much differentiation, so seeing strong margins that hold up through cycles is always encouraging.”
He added that the cost-conscious culture of owner-managed businesses can sometimes be a barrier to growth.
“We’re used to investing in owner-managed businesses where every pound has been a prisoner. There are real positives to that mindset, but it often means the business has been underinvested.”
Callum Milne, managing director of Radix, said organisational flexibility and relationships were key.
“One of the most strategic changes we’ve made over the last 18 to 24 months was not holding all our installation resource centrally, So when projects are lumpy, that’s a real margin hit if you’re holding all that overhead. Having that flexibility means we can manage bigger and more complex projects as we’ve scaled, while maintaining profitability.
“It’s not about moving away from transactional relationships, but how those relationships have evolved as we’ve grown the business.”
Glen Stocco co-founded Plane & Simple, a building materials marketplace that he exited last summer. As his business grew, a clear scorecard became an important part of how the firm’s team managed performance. The senior team reviewed it weekly, with a monthly all-hands session giving the wider company visibility on progress and priorities.
“Each metric had a clear owner, creating accountability and giving everyone visibility of what we were trying to achieve, Glen explained to the roundtable. “Those measures became leading indicators for the business. They helped us see what was likely to happen next and how it would flow through to the P&L [profit and loss].”
When margins slide, boards can be tempted to replace the person at the top. Michael Diamond, managing director of executive search firm Norman Broadbent, warned against making that the first move.
“There can be significant lead time to get any new member of a leadership team, CEO or otherwise, up and running, he said.
“If margin pressure becomes the most pressing issue, you can’t have a leader that is solely focused on cost cutting.
“Whilst they might solve a margin pressure issue in the moment, are they strategically or commercially capable enough to decide how to grow the business beyond that?”
Andrew Gilbert is an investment manager in Quilter Cheviot’s corporate exit team. In his view, the businesses that achieve the best prices combine a consistent growth trajectory with staff who understand the numbers behind it.
“It’s really important to have a clear vision that management can communicate across the organisation, and to get buy-in from your staff on those key metrics, he said.
“That’s where transparency can really help, as well as working out the key factors they need to be focusing on and linking them into their KPIs.
“Ultimately, a higher quality business has more ability to pass on margin pressure.”
Supplier relationships key for margin protection
Strong supplier relationships can cut costs more effectively than squeezing them.
Dave Pearson, pictured at the roundtable, right, group sustainable development director at Star Refrigeration, told the OMB gathering that the Glasgow firm is reviewing its processes to strip out friction with suppliers.
“If we can make it easier for our suppliers to do business with us, not asking for quote after quote after quote, then in theory their costs should come down,” he said.
“It’s not that we’re squeezing them. We’ve helped them be cheaper, we’ve helped them be more cost-effective.”
Grant Keenan, managing director of Keenan Recycling, which was sold to Biffa in 2024, told the roundtable that trust with suppliers carried his business through the worst days of the Covid pandemic.
“We always played fair. We never tried to shaft people even when we thought we had the upper hand, because the pendulum of power always swings,” he said.
“If we had cash flow issues, we’d say this has happened, we’ll give you this on this date – and we always did.”
Craig Fairfoull, group director at Dundas, said that his group only deals with partners willing to
commit for five or ten years, saying: “Over the longer term, particularly when activity levels peak, we are confident that our supply chain will prove far more resilient.”
FIVE KEY TAKEAWAYS
1 Cash beats profit A business can be profitable over the course of a year and nevertheless still run dry in month-six. With this in mind, auditors now commonly put forecasting ahead of the profit line.
2 Read margin top down Investors look at whether growth comes from volume or price, then at gross margin, then at overhead. Gross margins that hold through cycles signal real differentiation.
3 History is output, not insight Investable businesses can explain the drivers behind their numbers and show how decisions move them.
4 Margin discipline is cultural It works when every metric has an owner, the numbers are shared openly and they are tied to key performance indicators.
5 Don’t cut your way out A cost-cutting leader may fix this year’s margin but not the overarching growth plan. Long-term supplier relationships can protect a profit margin more effectively than spot pricing.