There has been impressive growth within the construction industry reaching record-breaking numbers over the past couple of years, however, the good times could fade as commodity prices remain high and supply chain issues persist. Critical construction materials, like steel mill products, have gone up in price by almost 75% because of disruptions to the supply chain. This has started to take a toll on new project demand, with US building permits dropping 7% in the month of May alone. With many economists predicting a recession will occur in 2023, the future of the construction industry remains unclear due to the many economic and global implications at work. These uncertain times highlight the value of receiving adequate financial planning and consultation to make the most informed decisions.
Even over a decade after the Great Recession of 2009, the age-old wisdom, “those who do not study history, are doomed to repeat it,” has never seemed timelier. The following article highlights four best practices critical to building a recession-proof business strategy focused on risk mitigation.
Have A Growth Plan
In the early stages of a company’s life cycle, once operations have achieved sustained success, bottom line growth is realized by way of expansion. From talent acquisition to physical office locations and the procurement of various resources, expansion is only healthy when it does not entail significant debt. In the instance of an economic drought, returns expected from these investments may cease entirely. The amalgamation of increased debt and underperformance can spell disaster for any business, economic activity aside. Significant acquisitions and investments should always be approached with caution, especially when unfavorable economic conditions are at play.
Avoid Complacency
Another aspect of risk mitigation is the ability to make proactive decisions during critical times. Businesses that are most vulnerable during times of recession are those that are slow to react. There is a minute success rate for those who attempt to weather unfavorable economic conditions without making necessary adaptations. When threat is near, complacency becomes the primary detractor. It is less damaging to sacrifice resources up front than to be stuck with administrative overhead and other losses that erase equity. Whether a business is subjected to underperforming sales or a full-fledged economic decline, delaying the decision to “down” or “right” size assets can ultimately prove fatal.
Monitor Revenue Projections
A viable method to accurately predict the size and extent of an economic recession does not exist. Considering the mercurial nature of the economy, it is critical that revenue projections are monitored and adjusted on an annual basis, at a minimum. Flexibility equates to proactive business management. A willingness to make cuts to workforce and overhead, as needed, will greatly enhance your company’s prospects in times of unfavorable conditions. Critical to this effort is the prioritization of assets from staff to business locations and other sizeable resources. The key to making informed decisions is having the data needed to produce calculated actions, knowing where money is being made and lost.
Know Your Capacity
Sufficient analysis of monthly data involves the dissection of individual job metrics including niche/market performance, client profitability, and metrics evaluating job location viability and conditions. Profits and income statements should be reviewed monthly. With this data in mind, make intelligent, informed decisions when considering bids for respective projects. Due diligence is critical when considering a job in an unfamiliar territory, and, in an instance where the business is struggling to find work, consider the bandwidth of your resources when contemplating a bid. Contractors often weather poor economic conditions but go bankrupt as the market begins to show signs of acceleration. The culmination of taking on too much work, having insufficient bandwidth, being awarded jobs as a result of consistently low bids, and, subsequently, running out of cash, is a formula for disaster. Be disciplined in the work you pursue. Know your capacity, and be precise in managing your schedule.
The volatility of market conditions, along with the complexities of resource management and financial forecasting, is a constant threat to contractors of any size, market, and location. VonLehman’s Construction Industry Service Group is experienced in preparing clients for financial and economic crises of any magnitude. Contact us today at krichardson@vlcpa.com or 800.887.0437 to find out how we can help mitigate risk for your business and protect your company’s bottom line.
