For many contractors, business is good or at least far better than it was two, three, or even four years ago. When things are good it’s smart to ask yourself a critical question: Are you prepared for the next downturn?
It’s a given that we have up and down cycles in this industry and in the economy in general. It happens about every five to seven years in the construction industry. The last big down cycle that began in the U.S. in 2008-9 took out many construction-related businesses because they weren’t prepared. The same happened during and after the recent Covid 19 epidemic. Many contractors took things for granted. They assumed leads would always be there, because they had more leads than they could handle. They assumed cash flow wouldn’t be a problem, because they always had cash flowing through their business.
A few years back Mark Buckshon, a Canadian journalist in the industry, published an article on this topic. The last I heard, Mark had retired, but his article is still available and still applicable. Let me share the major points here.
“Separate your personal and business affairs sufficiently that a business failure won’t pull you down personally.”
You don’t want to lose your house because the bank takes it when your business fails. You might think this doesn’t apply to you because you’ll make sure your business doesn’t fail. However, not every business failure is the direct fault of the owner. Many subcontractors lost money and their businesses, not because of their own bad decisions, but because they couldn’t get paid by the general contractors they’d been working for. Others were pushed into bankruptcy because of homeowner disputes. Stuff happens. Protect yourself.
“Never stop marketing. Develop a systematic thoughtful approach to your marketing and stick to it.”
If you’re consistently marketing 24/7, as you should be, you should have enough business that a small bump won’t force you to take a job just so you can eat. If you have a good marketing program to generate leads, and you constantly develop and tune it, you’ll survive hard times. Of course, you must watch what is going on around you and adjust as conditions dictate. Your marketing budget for remodeling should be between three and five percent of your total sales. Specialty contractors and those building new homes will spend one to two percent of total sales.
Depending on referrals isn’t a marketing plan. Referrals are great but when the economy heads south, referrals tend to dry up. Many of the construction-related businesses that failed in recent years depended on referrals to generate leads. Big mistake! When referrals dwindled, they didn’t have enough cash to start marketing and they didn’t have enough time to wait for results.
A marketing plan that is focused on the clients you want to attract, your ideal client, in the geographical area where you want to work, is a necessity, even when sales are strong, because it will become your bread and butter when the market gets weak.
“Be ready to face the hard decisions quickly before it is too late.”
There are two aspects to this. The first is that you need to know your numbers. If you do job costing and have a clean and clear Profit and Loss statement that you review and understand on a regular basis, you’ll be better able to see what’s coming. Do you have the right number of employees for the volume of work that you do? Are you making smart purchasing decisions? Are you paying yourself too much money for your volume?
The second is facing those hard decisions when they need to be made. It’s far easier to hope that things will get better, but while you spend time hoping, cash keeps flowing out the door. Hope is not a strategy! Don’t fiddle around; when you see problems in your business, make decisions. If you think things might improve, set a date where you’ll act if it hasn’t improved. Don’t let problems continue to drag your business down.
“Ideally put yourself in a place where you don’t need to panic or stress. Then you can catch the upswing and opportunities when they arise.”
The best way to do this is to have an Operating Capital Reserve Account (OCRA). You can also call it savings: funds your business can fall back on if and when money gets tight. Set a goal for the account, reach that goal, then don’t touch the funds. I talk about how to set that goal in this article.
An OCRA will eliminate some of the stress you’ll have when you see things tightening up. It buys you time to make the adjustments necessary to get through. Many of our coaching clients who had an OCRA in place in 2008, and again in 2020, made it through the downturns and are still in business today. They also didn’t have to go into debt to survive, which means that today they are building their companies instead of paying off debt.
An OCRA isn’t a line of credit because it’s your funds you are using. When you use a line of credit, the bank is making money off you with the interest you owe. Instead, set aside that “interest” now so that down the road you’ll have the funds you need without asking for help from the bank or another lender.
The knowledge and experience Michael Stone gained in his 60+ years in construction has helped thousands of contractors improve their businesses and their lives. He is the author of the books Markup & Profit Revisited, Profitable Sales, and Estimating Construction Profitably, and is available for one-on-one consultations as needed.
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