There’s no such thing as an eternally strong economy. There will be ups and downs, and it’s not easy to predict when the next “down” will come. For this reason, businesses must plan for recessions. By taking proactive measures now, companies can weather tough times and come out strong in the end. These three measures can be immensely helpful to contractors during challenging economic times:
1. Master cash flow management
Cash flow management is the most important aspect of profitability. During a downturn, it’s even more critical.
Cash flow refers to the net amount of cash and assets moving in and out of your business. To get a good understanding of your cash flow right now, and how it could change in the future, consider:
Your current and upcoming expenses
Calculate how much you need to get through each month to keep your business in the black. As you assess your general and administrative expenses, look for areas you can trim so you can cut expenses quickly if you need to.
When you have a strong positive cash flow, it can be tempting to use it to expand your business. Doing this, though, can put you in a weaker position during a downturn. Use extra cash to build a reserve that can cover G&A expenses during a period of few opportunities.
Alternatively, consider reinvesting in your business, such as replacing outdated equipment that could turn into a large repair cost later on. Before investing in new equipment, consider your financing options. Buying a piece of equipment will cost a lot upfront, whereas leasing equipment will allow you to keep more of your cash liquid, for necessary expenses.
Using a payment calculator can help you budget out newly leased equipment. Using other resources on the Cat Financial website, like the affordability calculator or lease/own comparison tool, can help you plan your budget responsibly.
Your clients’ ability to pay
One way many contractors fall behind is when money they’re owed never comes in. Contractors have the right to ask their clients about financing information before they begin work, as well as when a payment is late, Construction Dive advised.
The financial health of your business is a top priority. It is reasonable to pause work due to insufficient financial information, or to charge for costs that arise due to the delay.
Cash flow management after a recession begins
The beginning of a recession is the time to carefully review your cash flow management strategy if you haven’t done so already. During the downturn, being strategic now will make it much easier to weather the storm. Here are some actions that should be on the top of your financial to-do list:
- Trim costs: Once you’ve reviewed your current and upcoming expenses, you’ll be able to evaluate which areas are 1. Easiest, 2. Most impactful and 3. Least essential to your business.
- Focus on profitability: Pour your resources into projects that will pay off. Your focus should be on maintaining a positive cash flow, and that begins with protecting your most valuable revenue streams.
- Stay in touch with high-value customers: Your repeat clients are probably also trimming costs, but don’t let your relationships go cold. One day, they’ll have another project to be completed, and you’ll want to ensure they come back to you rather than heading to a competitor.
2. Use lines of credit responsibility
With a line of credit, you’ll have access to a certain amount of money on a rolling basis, and are expected to make monthly payments on it.
Using a line of credit can ease cash flow challenges. Say you’re in the middle of a big project, and you know you’ll receive a certain amount by a specific date. Before that date, you may have bills that need to be paid. Your line of credit can cover those expenses while you wait for that payment.
3. Implement a system to track project work
One common challenge contractors face is having an up-to-date understanding of their current projects.
Cloud-based enterprise resource planning (ERP) systems make all your financial information available to you anywhere, anytime - provided you have a mobile device and an internet connection. Keeping a close eye on project progress can help prevent scopes from going over budget or off-schedule.
If an ERP is not an option now, a fleet management tool is the next best thing. This tracks information like uptime, fuel usage and equipment location. The more information you have about where your teams are operating, the more control over your financial situation you’ll have.
4. Support your community during hard times
No one is immune to the effects of a recession. While your business will likely be affected by an economic downturn, so will the other people and businesses in your community.
Reach out to the people, businesses and committees in your area to find out where your expertise will make a positive impact. Giving back during challenging times is not only a charitable thing to do, but it will also show that you care about your neighbors and give you an opportunity to demonstrate your strengths.
When the market makes a turn for the better - and it will - the people you helped will remember the generosity you showed, as well as the quality of your work.
Recession-proofing your business is an initiative that too many companies overlook. Taking the time to review your financial outlook can make it much easier to weather an economic downturn.