In 2020, the longest-ever U.S. economic expansion finally ended after more than 10 years. Admittedly, it took a global pandemic to derail it, but recessions do happen for far more mundane reasons, such as subprime lending (2008-2009), tech stock exuberance (2001), war (1990-1991) and high interest rates (1981-1982). The point is, the good times lasted so long that there are probably many in the industry who have never experienced a downturn.
For construction firms without a long history or depth of experience, this could be a serious consideration going forward. Recessions can manifest almost overnight, so there is no better time than today—as we emerge from the COVID-19 pandemic—to begin planning for the next one. In previous blog articles in this series (links appear at the end of the article), actionable ideas have been offered to help construction industry firms navigate a recession. But it is equally important to discuss how to avoid poor decisions that will harm a business—or worse.
This may seem obvious, but taking control is a two-part operation. It is essential to make smart decisions when confronting a crisis and, to do so, company resources and reporting must be up to the task.
Up-to-date and accurate financial information is essential to making tough calls—areas of focus were outlined in detail earlier in this series. Accounts payable and receivable, CRM software and collections are all ripe for automation and, once converted, will provide the precise data needed to act decisively. There is also the strong likelihood of delays in delivering building supplies and price spikes, and the pandemic even sparked government action on shutting down certain projects. These are all unwelcome but fairly predictable developments when times are bad.
The second aspect of taking control is appearance. To be an effective leader, one must lead with confidence and purpose. Projecting strength to office employees, engineers, and other skilled laborers will instill confidence and ensure clients are getting everyone’s best work. This is also where reliable, objective management reporting is critical. Tough decisions are much easier to explain using data—relying on hunches, “gut” instincts or the behavior of competitors makes executives look lost.
Don’t forget: Employees who are uninspired and scared of the future will make mistakes and be unproductive. This is not a recipe for construction company success in a recession.
Focus on Cash Flow
Business schools preach long-term planning, but in a recessionary environment, things can get ugly fast. Cash is fuel, so companies should run some cash flow projections for several short-term (one-, two- and three-month) periods. Conditions may seem terrible, with project orders dropping and receivables growing, but this is where strong reporting systems are essential. Data will be needed to find out just how bad the current business environment is.
Running a number of cash flow scenarios will give management the information needed to forge ahead with confidence. Also, to safeguard future cash flows, be sure to protect any rights to apply liens to work already done.
Not All Expenses Are Created Equal
Once the leadership team is armed with all the data needed to make tough decisions (e.g., expense reductions) and back them up, what’s next? Earlier in this series, a number of cost-saving ideas were outlined in detail, but there are two common targets where budget cutters should tread with caution.
Marketing activities are frequently the first to be curtailed during any kind of business slowdown, and although this is an easy target, it may do more harm than good to cut back on marketing. Using real-time management reporting, it will be simple to calculate and track return on investment for specific marketing activities. Expense reductions using an ROI framework can be focused on inefficient activities and will be easily documented.
Further, reducing headcount is often done opportunistically. For example, it may be tempting to delay replacing an employee who is leaving the firm. Before finalizing this decision, consider the impact the unfilled position will have on such areas as production capacity, operations and morale (because of increased stress and overtime).
After reflection, contractors may decide it is smarter to promote someone into the vacancy and have the “new” vacancy duties spread among the staff.
Beware of Discounting
Never, ever arbitrarily lower prices to attract customers. Discounts are a slippery slope, and clients are notoriously quick to grow accustomed to getting something for nothing. And good luck explaining to the sales team how they will need to increase business by 75% to offset a 15% across-the-board discount (assuming a 35% margin). A better idea is to explore new pricing models, packages and incentive contracts to maintain revenue and margins.
Chasing low-margin business (or questionable sales leads) can also hurt in the long term. Management reporting will identify the profitability of each client for ranking purposes so any new business can be optimized.
A recession can’t help but bring change—change to the contract strategy, change to project bidding parameters, and change to deadlines and payment schedules. Adapting is critical because in business, the swift and agile win the race (and the slow get eaten by the swift and agile). Adaptation might include adjusting business models, shifting acquisition strategies or optimizing pricing.
But also consider a time of tumult to be an invitation to work more closely with existing customers. Ask them what they need and what additional services would be valuable, and assess what they may be willing to pay for such changes.
Leaders lead by making the right decisions using the right data and standing behind their decisions. Leaders also avoid mistakes. Be decisive, productive and inspiring, but also be right and foster a highly productive and formidable business operation.
This is the fourth article in a five-part series on surviving recessions. Click here for part one on management reporting and forecasting, here for part two on pricing, and here for part three on billing, collections and automation.
Originally published by Construction Executive on May 11, 2021. Used with permission.