There's lots of talk going around about a possible economic downturn. In some areas, evidence of hard times is already visible. How can contractors strengthen their businesses to survive during lean years?
The answer is in the question: keeping a business afloat during a recession requires strengthening its operations in line with overall goals and visions. This article will discuss a few things you can do to ready your business to survive a recession.
First, let's define a recession, so we can decide if the US is in one or can expect one soon. According to some definitions, the country is in recession when the economy experiences negative gross domestic product (GDP) for two quarters in a row. By this definition, the US entered a recession in the summer of 2022.
However, rising unemployment, reduced retail sales and manufacturing activity, and other factors may also be considered in declaring a recession. The National Bureau of Economic Research (NBER) is regarded as the authority on pronouncements of a recession's beginning and end. It has not declared the US in a recession since the downturn in 2020.
Construction's backlog has so far protected the industry from many factors of recent economic compression, and building demand continues to be high. But beginning in the latter half of 2023, experts believe this may change, and the industry must be prepared to feel the full brunt of a wounded economy. Here's what you can do now to get your contracting business ready.
Remember in 2020 when the word "pivot" became a favored term? Things were so unpredictable that it became necessary for people and businesses to learn how to change direction on a dime.
The bluster of the pandemic has passed, but there's still a great degree of uncertainty facing the construction industry. While contractors deal with increased costs, materials shortages, and a lack of skilled labor, the industry is also undergoing a digital revolution that requires new skills and mindsets. With all this going on, adaptability is still a valuable skill set.
The need for flexibility extends beyond overall business direction to individual project work. Flexible construction companies can recognize complications early and rejig the schedule to maintain pace and momentum, avoiding widespread project delays. Flexibility also means maintaining project viability with fewer workers by using employees effectively. Achieving these goals requires complete information about how project teams currently operate, and the mental space to problem-solve any issues that arise.
Contractors should strive to bring flexibility into their contracts, too. Throughout 2022, material prices varied drastically, impacting contractors' business costs over longer projects. Governments and industry associations are helping contractors draft escalation clauses to include in their contracts to protect them from surging prices.
Surviving a recession means doing more with less. Employees shouldn't have to work harder – just the opposite. Efficiency means using people, materials, and systems better to achieve the same results with less effort. Easier said than done, right?
Efficiency doesn't come by chasing your tail, trying to get faster and better at what you're already doing. Innovative contractors improve efficiency by closely examining business practices and goals, then using an open mind to find a better way of doing things.
Examples of improving efficiency might be
- minimizing waste through thorough planning and reduction of rework
- identifying employees' skill sets and placing them where they're needed most
- streamlining and automating repetitive manual processes, including accounting and receivables tasks
Efficiency does more than save you time and money, it actually makes you better at what you do. It means you're making fewer errors and creating better quality work while using your resources responsibly.
How does a construction business become more flexible and efficient? As mentioned, trimming the fat around operations necessitates deep knowledge of current business operations. You need hard numbers demonstrating how you're using materials, workers, and time, so you can figure out how to use them better for maximum output.
In other words, what you need is digitization. Using digital systems to schedule your projects, people, equipment, and payables and receivables facilitates tracking everything you do, giving you the knowledge you need to work smarter instead of harder.
Control your cash
Now that you've prepared your business to be a lean, mean building machine, you need to get extra smart about where your cash is and where it's going. Many construction businesses fail because they lack the cash flow to continue their projects, so a bit of savings on hand could be the saving grace for your business. However, there's a balance to strike between saving for a rainy day and hoarding to the point of preventing growth.
Prepare for a recession by better managing your cash flow, by
- Maintaining a cash flow document
- Establishing a cash flow backup plan
- Cleaning up and automating your accounts payable and receivable systems
Truss is an online payment solution that can help you get your cash flow in order while streamlining your accounts payable and receivable systems to maintain greater control over your money.
Experts continue to debate the certainty of a coming recession, but contractors don't have to wait for an economic forecast to bolster their businesses against one. By revamping business operations to align with long-term vision and goals, and becoming more agile, streamlined, and technologically savvy, contractors can make their businesses stronger no matter what happens in the economy.