During the last great U.S. recession companies learned a valuable survival lesson. Since then, reports and studies have dissected the data to identify steps that can help you when the next downturn happens. Here are strategies to blunt your company’s pain during and after the next economic retreat.
When times are good, there’s a tendency to see the world through an optimistic fog. To guard against this complacency, you might consider challenging your assumptions. According to an article published in FMI’s Quarterly, it is best to “take a shrewd, introspective account of the efficacy” of your business practices when the economic conditions are still healthy.
- Are you successful because your company operates highly efficiently, or does your success simply reflect the current market cycle?
- Have you used the good times to put the right people in place and acquire the right resources to support your long-term growth goals?
- Do your project margins come from innovation, or do they come from tired, familiar tactics?
Assess Your Risks
Now is the time to explore the risks lurking in your business that could make the next downturn too painful for your company to endure.
Start with your operations and assess your project margins, paying close attention to your indirect costs. If you are seeing project margins slipping even a percent from your goal, it should raise red flags. Especially, since many contractors don’t understand the difference between profit and gross margin. You need your gross margin to cover your costs. Otherwise, without an adequate gross margin, great profits are just an illusion of success.
Next, look at the efficiency of your inputs. If your people (including subs and suppliers) don’t consistently deliver what’s needed across different types of projects, you’re sitting on a time bomb. Said bomb could potentially wipe you out when another recession strikes.
Do you harness technology to make your project communications and collaborations efficient and seamless? Is your estimating and scheduling top-notch?
Consider how well you are communicating expectations and requirements to your people so they know what it takes to be successful. Then, reassess how you prepare people to assume greater responsibilities. If you don’t train them, who will?
Help them map out their progression, and make certain everyone knows what is taken into consideration when you decide who is ready for promotion. Make sure you are rewarding people according to their contributions. When someone assumes a new position, provide them the benefits they need to focus on the job at hand.
Finally, how is your equipment performing? Do you track hours, use, costs and returns on investment? Are you using the latest technology to secure it and keep maintenance up to par?
Once you’ve attended to the basics, you can apply four learnings from the last recession to improve your outcomes the next time things go south.
Get Rid of Debt
Harvard Business Review reports that companies that managed to outperform their peers after the last recession did so by simultaneously saving and investing their way out of the crisis.
Dubbed “the resilients,” these companies dropped debt by more than a dollar for each dollar of total capital. How did they achieve that? By dumping unprofitable activities and assets. However, at the same time, they also continued their investments in innovation and customer service.
Focus on Efficiency
So, what might dumping unprofitable pursuits mean to a construction company? Well, maybe you’ve got a sideline service that hasn’t ever really taken off. Or, maybe that expansion into a nearby county isn’t giving you the returns you get from projects in your home territory. Or perhaps you own idle equipment already beyond its reasonable life cycle. Whatever the case, finding those items that no longer serve you and jettisoning them is a strategy top performers used last time around.
Be careful, though. If you take the wrong cost control steps, you can do more harm than good. If your goal is to grow your profits over time, cut costs in line with your growth plan. Otherwise, your cost-cutting will impact your growth negatively and slow down your recovery from economic downturns.
Have a Growth Plan
Don’t have a growth plan? Then you’re in for a tougher time when the economy or the sector enters a downturn. Without a plan, you’ll end up responding to short-term stimuli and might miss the signals telling you when to pull back on your spending. That can leave you struggling with unnecessary overhead or making decisions that reduce your equity.
Losing equity is often the first event in a business’ demise.
For instance, the downturn hits and because you missed the cues, your main project has marginal returns. You’re deep into it and carrying the overhead that requires a job with a bigger margin. Worse, there’s no other better-paying work in sight. To compensate, you resort to selling a near-new piece of equipment at a fire sale price. Or, you lay off a new project manager you’ve just got trained. In either case, you’ve just lost equity. Getting a comparable piece of equipment when times improve will cost you dearly, as will finding and training another project manager.
Innovate and Communicate
The last strategy is staying invested in innovation and customer service. It not only continually helps improve your operations, but it also keeps you top of mind with current and potential customers. Maybe they don’t need your services right now, or no one they know does. Nevertheless, once the economy picks up again, it’s likely to change. Think of all the ways you can stay involved and connected to your market and make that a key aspect of your daily operations.
Researchers found one other result for the top-performing companies that followed these strategies. They went on to outperform their peers in the post-crisis years.