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Advice to construction and development businesses: Prepare a strategic business plan showing a 30% or more decrease in revenue. Preparing this version will force you to conserve cash by cutting all the fat and some bone from your operations.
The sky is not falling. Yet, declining business conditions in cyclical industries like homebuilders, contractors, sub-contractors, land developers, and construction suppliers caused by the ongoing recession are going to be difficult for a while. Business owners in construction industries who strategically plan and prepare will avoid work-out situations with their banks and obtain better results throughout the downturn. They will be in a position to soar when opportunities return with the strengthening economy.
My advice to owners in construction and development businesses is to prepare a version of your strategic business plan showing a 30% or more decrease in revenue. Preparing this version will force you to conserve cash by cutting all the fat and some of the bone from your operations.
• Many goals that would normally be highly ranked will need to be deferred in this version unless they result in rapid and deep cost savings.
• With a 30% reduction of revenues most of your marketing budget will disappear. I agree with the marketing experts who say this should be the last line item you cut but at some point new prospects are not looking. Ask homebuilders about their numbers of genuine customer prospects right now.
• Do you have key people you could try to place with other firms? I worked with a general contractor who placed several key employees with property management firms during downturns and took them back when the market resumed.
• Are there new relationships you need to establish to outsource work that has previously been done in-house. Outsourcing saves you money as you typically only pay for time and materials as needed.
There are many alternatives to cut costs when it has to be done. You will find ways to get the work completed efficiently and products delivered or services provided. By planning in advance you will make better choices and you will strengthen the long term position of your firm should your market contract.
Once you get your cash flow stabilized factoring a 30% revenue reduction start looking at where new opportunities may come from.
• Can you transfer some of the ideas for cost savings to the more optimistic versions of your strategic plan and increase profitability?
• Perhaps you could invest the potential cost savings in an acquisition. Over the next several years there will be great opportunities to purchase underperforming companies. If you see an interesting opportunity make sure you understand what the other company has that could propel you forward. A great storage yard or other hard assets, key relationships, valuable licenses, etc.?
• Is there a product line that will expand in your industry even during the downturn? An example is that historically expanded maintenance services on older cars have provided income for auto dealers in downturns.
At this time, strategic plans for businesses in cyclical industries should include a version that tackles uncontrollable revenue reduction head on. In the current market this is not pessimism, it is preparation. Good times will return and those who have prepared and conserved cash will be able to capitalize on the new opportunities to grow rapidly.
About the Author: Gregory R. Caruso, CPA, Esquire, CVA, is Principal at Harvest Associates a Baltimore based M&A and Consulting Firm. He has deep commercial project management experience and spent 10 years running a substantial local homebuilding company. He assists firms having issues with cash flow, profitability, and those desiring a merger or acquisition. Greg can be reached at 410-507-5441 or gcaruso.harvestbusiness.com