Recession Proofing Your Business By Creating Resilience

by Laura Dodde, HELM Business Consultant

With interest rates increasing, ongoing labor shortages, the ever-changing costs of materials due to supply chain issues, and product shortages, homebuilder confidence has plunged and fanned the fear of a recession within the building community. The pressures are being felt across the country and are causing some would-be buyers/renovators to hit the pause button on upcoming projects. But what does this mean to you, a business owner, and what can you do to safeguard your investment?

Nothing is for certain and even the most experienced and highly recognized economists can’t predict how the next year will unfold. What we do know is that there are steps you can take to help secure your company’s future. Let’s take some time to talk through some actionable steps you can take to put your business in a favorable position to navigate the uncertainty.

Numbers, numbers, numbers.

Knowing your numbers is the number one key to a successful business. Having clarity on your company's target annual gross profit margin and knowing your estimating markups, accompanied by a good estimating tool, and solid job cost accounting practices can make all the difference for you and your business. Not only does this help you accurately project the gross profit needed to sustain your business, but these practices allow you to come within +/- 2 to 5% of your estimates, giving your clients peace of mind and allowing the business to hit its target margins to continue operations.

How do you establish your target annual gross profit margin? By creating and tracking against an annual business operating budget. An Operating Budget is established by projecting or estimating the annual revenue for expected projects, the cost of goods needed to produce those projects, and the overhead expenses it takes to operate the business. The operating budget should be reviewed and tracked against the actuals on a monthly or quarterly basis and can be adjusted if major changes have occurred.    

Review, review, review

Financials aren’t just for your banker. Financial literacy is a business owner’s secret weapon. Being able to look at the P&L, Balance Sheet, and Job Profitability reports and read between the lines is essential. It isn’t just about the bottom line or Net Profit. Financial reports offer insight into the inner workings of your business. Did the business meet its revenue goals last month? Is the Cost of Goods Sold in line with your projections? Are your expenses trending upwards or are they on target? With solid financial literacy, you can not only read these reports and answer the previous questions, but enable the identification of the root cause of any anomalies and take corrective actions.

Money in the bank 

In a perfect world, every business, whether it’s construction or another industry, should have 3-6 months’ worth of operating cash in the bank to cover overhead and operating expenses, but for many small businesses that is a challenge. While it isn’t advisable to restrict the growth of the company by hoarding cash, it is good practice to put aside funds to cover overhead and operating expenses in the event of a shortfall or unexpected gap in the production schedule. This along with a deep dive evaluation of your current operations to identify areas that can be trimmed back or cut, can boost your company’s resilience during challenging times.

Alternatively, having an established line of credit with your lending institution is helpful. If you don’t have one already, now would be a good time to apply for a revolving line of credit. It is easier to get a line of credit when times are good, rather than when there is a financial need. A line of credit can be used as a safety net to compensate for potential cash shortages or gaps in production. It is not advisable to use them as a long-term solution, but they can be a lifeline during challenging times and can be helpful in building your relationship with your bank.

Employee Retention

We all know that there is a shortage of skilled labor and it can be difficult to fill vacant positions. For this reason, it is more important than ever to identify and retain high-performing team members. This can be done through competitive compensation, benefits, and other incentives. Having clear, documented job descriptions with clear pathways for advancement is another helpful tool in an organization’s retention strategy. By providing robust onboarding practices that identify training, coaching, and development opportunities to grow leadership within the team, and by maintaining a transparent and consistent review process, a company can empower its team members with a clear understanding of their role, responsibilities, and their future within the company.

“The construction industry needs about 650,000 more workers on top of the normal pace of hiring to meet demand this year, according to analysis by Associated Builders and Contractors.” 

- Market Watch “5 factors drive the cost of new homes – and all of them are squeezing builders and buyers now” 08/01/2022

Production Backlogs – Not such a sure thing

Over the past few years, contractors have begun to rely on their production backlog. Some builders have projects under contract more than 24 months out, depending on the area. But with rising interest rates, material costs that are constantly changing (and not in the client’s favor), and the threat of a recession, there is an increased potential for clients to put projects on hold or to outright cancel them. So, what should you do?

Analyze your past several projects to see how long it took for a lead to turn into a pre-construction agreement, and for a pre-construction agreement to turn into a construction contract. You need to know what your project development timelines are so you can understand when you need to take action to drum up more leads. If it takes you 12 months to turn a lead into a construction contract, generating a lead today will probably not help you fill a hole in your production schedule that's 6 months away--you need to act before that hole in the production schedule is 12 months out.

Don’t put too much faith in your “backlog” and establish contingency plans. Get client commitments early in the form of letters of intent and non-refundable deposits and have a “plan b” project waiting in the wings, without over-committing.

Communication

It is more important than ever to have a clear line of communication with your clients. If you are starting to sense hesitation, uncertainty, or frustration, address it immediately. Remember good customer service isn’t about the client always being right and getting what they want, it’s about them being heard and validated, and finding a mutually beneficial solution to the situation.

Stop kicking the can…

Marketing is often the can that is most often kicked down the road in small businesses, especially when many contractors are turning away business. But nothing stays the same, and if you've been too busy to focus on marketing, now is a good time to reevaluate your position. Do you know where the majority of your leads are generated? What are your company’s core strengths? What areas does your team excel in? Identifying your “Good Client” / ”Good Project” criteria allows you to focus your efforts and create a marketing strategy that plays to your strengths. Then it’s a matter of dedicating some resources to building up your visibility.

Bottom Line

If the pandemic has taught us anything, it’s that uncertainty is the new norm. But that doesn’t mean we can’t be prepared. Many contractors are accidental business owners, but that doesn’t mean they can’t be darn good at it. Taking steps towards better understanding your numbers, your team, your options, and your company is just good business. Enlist the help of those around you, fill in the gaps with professional help, and reach out to your building community. We’ve got this.