Most firms have put the bleeding of the recession behind them. While proftability is still not back to desirable levels, things are clearly improving. The operative phrase in most instances is "cautiously optimistic." If sales, margin and expenses follow the pattern of previous recessions, most firms will be okay by the end of the year. The typical EASA member will be far removed from the massive challenges of the past two years. On the other hand, they may be equally far removed from optimal proftability. The challenge is that in the euphoria of getting back to good, many firms will miss the opportunity to make it all the way to great.

"So this EASA member walks into a bank and asks for a loan."  Well, there's no need to wait for the punch line as it is no laughing matter. In many cases, the credit available to members has all but dried up. Where money is available, banking requirements are becoming more restrictive almost every day. The likelihood of things getting better any time soon is remote.

With enough patience and concerted effort, the cash challenge associated with disappearing lines of credit can be overcome by rethinking gross margin and expense levels even during a recession. In fact, this will be the topic of the next Profit Improvement Report.  However, many distributors need cash now, not in six months. The conclusion is that inventory and accounts receivable reductions are in order.

The reality is that most of the actions typically taken to lower investment levels are cash positive in the short run and dangerously profit negative in the long run. Given the multiple effects of cash generation programs, EASA members need to take a step back and rethink their investment levels in some different ways.

This report will examine two very different approaches to reducing the investment levels in accounts receivable and inventory:

• Chopping - An immediate reduction in investment levels to generate cash as quickly as possible.
• Pruning - A more gradual approach to investment reductions, but one that does not create long-term profit problems.

By almost any measure that can be used, 2009 was a tough year. However, even in the midst of a difficult economy, profit opportunities continued to exist. Just as in good times, some firms didn't merely survive - they prospered. Understanding just how firms adapted to changing circumstances to keep generating adequate profits provides a basis for both immediate action and for future planning.

The recently completed 2010 EASA Operating Performance Report (of 2009 data) provides detailed financial and operating benchmarks for the industry. As always, the primary benefit of the report is that it highlights the distinction between the performance of the typical firm and the high-profit firm. The differences are important in normal times; they are critical in tough times. (This article is based on 109 participants in the EASA 2010 Operating Performance Survey.)

The sales challenges associated with the recession have caused most firms to take a serious look at their operating expenses. Obviously, most of the effort has focused on cutting expenses. While that is an important task, a more fundamental issue is determining the nature of the firm's expense structure. That is, deciding whether the organization should build a heavy fixed-expense structure or whether it should rely more on variable expenses.