How to Deal with the “R” Word
There is a lot of talk about a recession and the slowing economy. No one knows for sure what is going to happen. As a contractor and businessperson, you have to be prepared and have an alternate plan of action.
PROOF Management has been in business since 1972. We have worked with contractors through a 70s oil embargo, 19 percent interest rates in the early 80s, the fall of the real estate market in the early 90s and many local situations such as factory closings or shifts of people. Talking about the economy is a fun conversational topic but talk accomplishes nothing and is a little like bitching about the weather. There is nothing we can really do about it. I’ll try to keep things simple.
The Darker Side
- An aging baby boomer population drives the economy and the boomers are very interested in investing for retirement. Many saw their stock portfolios lose 25 percent in 2000, but the market was simply overvalued. While many are nervous, the truth is they are still much better off than they were a few years ago.
- By the end of 2000, consumer confidence had dropped to its lowest level in 2 years.
- The winter of 2001 has started with a vengeance and it is going to slow shopping and consumer spending. Higher heating costs for consumers and snow removal expenses for local governments are going to drive up city and personal budgets again.
- Employees, managers and many other people who have only known nine years of good times really do not know what to do in a slowing economy and how to be tough in business. As the business gets tighter, the uninformed will try to sell their way out of volume and the successful contractor will watch cost and production.
The Brighter Side
- This is not the Great Depression. There is more wealth in America than any other time in history. The December issue of Money reports that 1 out of 8 Americans earn 100k a year or more. Throw in non-traditional families such as singles who live together, and this goes to 1 out of 7. In 1990, this was 1 out of 12. Today 1 out of 14 families have a net worth of $1,000,000 or more. That’s a four-fold increase from 10 years ago.
- When people do not buy new, they fix up what they have. In a more competitive market, businesses have to renovate to stay competitive. So while the new construction market declines, both the remodeling and retrofit residential and commercial market grows.
- The folks without names on their trucks and low capital, who are basically wage earners, are the ones in trouble first. The same is true for contractors who were riding the high tide of the nine-year good market with no marketing plan, no knowledge of their numbers and no budget. Long term, this is going to be good for the business. If you have worked hard to have a strong identity, diversify and establish a real brand name in your business, things will get slower but not non-existent.
- Many contractors already have all the work they can do. Shrinking a little may end up making you much more productive. You also may be able to pick up some good help from contractors who do a poor job at marketing. Unlike past recessions, the shortage of skilled workers is acute. The person who controls the labor force and sells quality work is going to be able to maintain a minimum standard of volume.
What to DoFinancially: Make a budget and really know your numbers. Watch work from month-to-month. If things slow down, look to see how you can delegate backwards. Maybe an estimator/salesperson can go back to work in the field. Maybe you can take insurance off a truck or two. Be careful of overextending yourself with equipment purchases and other fixed assets.
Go back to your statement five years ago. See what your volume, overhead and business looked like then. Try to determine how much of your current work is price-sensitive. Your business may have grown to the point where maintaining that sales margin may be tough. Remember, it is gross profit margin, not sales volume, that is going to drive your success.
Collections: New construction, both commercial and residential, is always hit the hardest. Keep a close watch on collections. Don’t let any one general contractor or developer get into you for too much money. Know the lien laws and be sure to be the first in line to get your money.
Do not let the big job that comes along from someone you do not know destroy your business. A general contractor or developer that owes its suppliers and subcontractors so much money that it is looking for new suppliers can be a frightening beast hidden in sudden good fortune. Watch receivables weekly and do not be shy. If a new deal sounds too good to be true, it probably is.
Personal: You own a business, not a kingdom. You are the leader. If you feel you have the “right” to take it easy, a recession may bust your butt. Business is not forgiving. If you bought a condo in Florida, a boat or an expensive car, etc., your employees will look at you as Fat Daddy.
If you have turned your business over to an estimator or salesperson, that person better know the numbers because he or she will make the decisions that determine whether the company makes or loses money. This also goes for kids. The simple truth is that many second-generation contractors have siblings who do not have Dad’s Depression mentality and may not be tough enough to run the business. Other businesses have a dad who wants to mess around in the business and not let go. Neither of these scenarios is going to fly in a recession.
If you are burned out, a recession will be even tougher on you. Half the contractors who join our networking groups suffer from burnout, 20 percent from severe depression or anxiety that needs immediate attention. Denial and failure to take action and be a leader will make things even worse. Get your personal life and health in order. If business is slow, go out on the job and work a couple of days a week. It will be good for you emotionally. Don’t just bark orders; get some calluses on your hands.
People Management: One of two things will happen in a slow economy: Employees will work harder to be more productive and keep their jobs or they will work slower to make the work last. Now is the time to give clear production goals and stay on top of things. When quoting a major job, you many want the foreman who is going to do the job to be part of the estimating process. You make money in the field and you have to pay attention to what is going on there.
Sales and Marketing: Now is the time to identify your best customers and work those relationships. If your sales effort has been a fax machine, you might be in for a rude awakening. Now is the time to physically visit customers and get to know them. If interior designers have been giving you work, you need to be their partner and work together. You really need to study your business-to-business contacts; whether they are general contractors, remodeling contractors or property managers, now is the time to separate the prospects and suspects.
For residential, you need to farm neighborhoods with money and become the neighborhood contractor. Find the money (there is more now than ever) and work the heck out of it. Do not cut back on marketing; rather, make sure it is targeted to the right people.
Suppliers: Make sure you are getting a competitive price. If not, look for the best service leads or support. If that supplier works a trade show with you and co-ops the booth, the value of that could be several thousand dollars. Remember, 5 to 10 percent of each product you buy is the sales rep’s expense. Are the reps giving you that kind of value?
In closing, if you practice good basic business fundamentals, don’t panic, it will all be OK. I personally do not believe we are going to have a deep recession. I do, however, see a lot of spoiled business operations that have been riding the high tide of the economy with no business plan and little understanding of where they are making or losing money.