Rising inflation, a shrinking economy, and other leftover threats from a global pandemic have left many people fearing an inevitable incoming recession. With the majority of economists agreeing on the likelihood of a serious economic downturn coming at some point in the near future, business owners across America are scrambling to find solutions.
In the last recession, no sector was hit harder than the construction industry. The number of contracting companies fell by nearly 150,000 between 2007 and 2013, alongside 2.3 million jobs being lost to layoffs, early retirement, and employees leaving to find higher-paying work somewhere else.
With the threats of the future seeming darker than ever before, many contractors are looking for solutions on how they can hold steady through an incoming recession. This article will cover all you need to know about how to recession-proof your construction company.
What are the Biggest Mistakes Construction Companies make during a Recession?
The biggest mistake a construction company can make during a recession is relying on backlogs, followed by poor financing, and a lack of cash on hand.
These mistakes follow from a shortcoming in preparation. It’s easy for companies to get caught up in how much work they have when the economy is hot. There is no fault in this; as they say, “you better get it while the getting is good.” The problem is that economic downturns hit fast and hard. Even if you’ve got work coming out your ears right now, the right combination of problems could cause a complete shutdown six months in the future. It’s hard to know how to prepare, but the following tips should add some solace.
How Construction Companies can thrive in a Recession
In the hopes of avoiding a reliance on backlogs, it’s essential for construction companies to find new customers in a recession. As hard as that sounds, it’s still possible. While many contractors fall into the trap of believing they can weather the storm with their strong list of backlogs, history would prove otherwise. In the peak of the last recession, many companies in the construction industry had backlogs of 12 months disappear as projects were delayed, put on hold, or canceled altogether. As your customers begin to lose their own ability to finance your work, you lose the work altogether.
Contractors in any niche can avoid this by expanding current offerings, or by offering more work to current clients. The key is in staying open minded to possibilities outside of what you are used to. The construction companies that thrive in a recession are ones who ignored the boundaries of the niche they were in before.
Maybe you make a living digging foundations and putting in underground utilities, but the recession has stopped all new construction. Now is the time to switch your services towards landscaping or maintenance, rather than what you’ve done in the past. Try and find low cost, high demand services in your area – landscaping and maintenance are just two of many common examples.
How Contractors can get a hold on their Finances in a Recession
We all have different financial situations. Some of us require loans to run our business, others don’t. Many of us have refused to get a loan altogether, but tomorrow’s circumstances can always change that.
It’s best to plan ahead, and forecast what problems your company is likely to face in the future. Are you going to need a new piece of equipment? A new tuck? Trailer? Help with Payroll? It can be challenging to get a loan in a recession, and sometimes downright impossible for contractors without work. That’s why it might be best to lock in a loan at a solid interest rate now.
Another financial misstep that many contractors make during a recession comes in the form of sloppy bookkeeping. Most contractors are best suited for professional work in their field. Bookkeeping can be a drag, especially when work is busy. But that doesn’t mean knowing your P&Ls, variable costs, and project timelines aren’t important.
As the recession cuts demand in your industry, margins become thinner, and work becomes harder to find. In other words, every penny counts. With employees to pay, clients to negotiate with, and deadlines to worry about, it’s essential to know what your capital inflow and outflow looks like.
Construction Expenses to Avoid in a Recession
Much like the loan situation, every company has a different set of expenses. When work is abundant, every expense can seem justified, but that changes during a recession. Assessing your finances and thinking critically about the profitability of each of your services can allow you to spot holes in your expenses. It shouldn’t take long for you to find the places you can cut costs and hinder expenses, but here are some of the most common to get you started.
Idle “productive” employees and equipment: If your business’s most important assets aren’t at work all of the time, you’re losing money. Even if you don’t have need of them in the moment, see if another contractor needs to rent a piece of equipment or sub-hire an employee.
Unproductive employees and equipment: Sometimes you just have to bite the bullet. In a recession, it’s important to assess whether or not an employee is worth keeping around, or if it’s time to sell equipment that goes unused.
One cost that you shouldn’t cut is marketing. Work never comes easy in a recession. A dwindling bank account can make you think your marketing efforts aren’t worth it, but you’ve got to hold the line. If anything, strategize around where your marketing efforts are best placed.
How can Construction Companies get ahead in a Recession?
For construction companies, getting ahead in a recession is about planning ahead, trimming unneeded expenses, and thinking critically about ways to drum up new business.
The process can seem complex, but with proper guidance and experienced advice, your business can thrive even in the harshest economy.
Getting ahead in a recession all comes down to a careful balance of finances, and it can be difficult to do that all by yourself – especially when things are tight.
At Nucleo Financial, we’re experienced in the business practices designed to beat the odds of harsh recessions. Two brains are always better than one. If you are looking for a second pair of eyes in assessing your financial situation and preparing your business for the future, feel free to reach out today.