GUIDES

10 Tips to Recession-Proof Your Construction Business

Here are a few tips to bulletproof your construction business from recession.

August 25, 2022

10 tips to recession-proof your construction business

The U.S. economy has been in recession for the past month, after two consecutive quarters with a shrinking GDP. This has generated a strong sense of uncertainty for the market, with expert predictions ranging from a mild landing to a severe recession. Regardless of the likelihood of a severe recession or the estimations of how long it will last, there are important measures companies should take now to prepare for a recession. Here are a few tips to bulletproof your construction business from recession.

1. Assess your current financial status and define a clear action plan

The first step to prepare your business for recession is to understand where you stand. As obvious as it might sound, oftentimes, companies are not in full control of their finances, and their management team has gaps in knowledge of where the company stands and what is the outlook under different scenarios. Make sure you review your financial status in depth and fully understand what your books show, as well as what implications this has for your business. Understand how much cash you have in hand and where are the weak points to your business. Ensure you have a full understanding of the implications of changes to your operation, particularly in terms of costs and revenue. Once you are clear on where your business stands and what the financial situation is, define a clear plan on what course of action the business would take under different circumstances. Establish what contingency actions would be taken in case of a severe recession and what actions have to be taken in order to be prepared to deploy that plan. Prepare your budget for difficult times and train your team on how to act during hard times. Many of these actions might end up being implemented, recession or no recession. Assessing your financial status most likely will reveal many opportunities to improve your business’ operations and lead you to a more efficient and less costly result.

2. Don’t wait and don’t doubt

Understanding your financial status is important because it will provide you with the tools to make fast decisions. When you have to take action, don’t wait. Time is expensive, and when important decisions have to be made, it is always better to make them sooner rather than continuing to prolong costs that can drain the business. It is important to highlight that acting fast does not mean rushing into uneducated decisions. Being prepared ahead of time will enable you to make the right decisions quickly.

3. Review your contracts and invest in insurance

Take a close look at everything your business is legally bound to and review what implications this has for your business. What are the costs and benefits of each? When possible, attempt to improve your conditions for them. When reviewing your contracts, don’t just focus on a select few. Understand your contracts with all of your stakeholders. It is in the best interest of all the parties that your business survives during recession, and this is a good time to make sure your contracts and obligations won’t keep you from doing so. If you’re not sure about the implications of your contracts, get professional advice and take control. When you know you have a high risk, invest in insurance. It’s always tempting to save that money and use it elsewhere, but taking on insurance early might help you prevent a harsh hit if your business is going through a rough period. Identify the weakest points of your operations and evaluate the possibility of adding insurance to these. Review your current policies and confirm you have the right coverage for the best price.

4. Be smart about financing

Loans and credits usually scare people off, especially with the possibility of a recession ahead. But credit shouldn’t scare you. Financing can be your most important resource as long as you’re wise on how you approach credit. Fear usually comes from a lack of understanding, so always start by fully understanding how the loans and interest rates you currently have or are planning on taking actually work and what impact they will have on your business. Leverage is determinant for the growth of your business, so having access to financing is actually a good thing. Understand your business’ debt capacity and the preparations needed to be able to pay back all your debts. You might need financing to prepare for a recession by improving your equipment ahead of a slowdown in order to become more cost-effective, or you might want to have a stock of certain materials that will most likely increase in price. By evaluating whether it’s a smart choice to take on that financing before a recession in order to be prepared for it, you are able to lock in interest and fees before they are too high. During recessions, financing alternatives that provide you with fees that will remain fixed while you pay back your debt might be a better alternative than rates that can vary. Remember, inflation causes the Central Bank to increase its interest rates and, as a consequence, so will banks, so a tendency towards higher interest rates can be expected. Alternatives like BlueTape, where you know beforehand how much you will be paying over the next weeks, can help you plan and avoid unexpected increases in your fees.

5. Focus on your margins and look for new opportunities

We tend to focus on sales to evaluate the success of our business. However, during a recession, raw materials prices tend to go up, and, in general, all operation costs will have an upwards tendency. This is why during economic slowdowns margins become more important than ever. Focus your business on those products and services that provide you the highest margins, since those are the ones that will most likely allow you to stay active. For those products and services that have low margins, evaluate what actions can be taken in order to improve them. Ask yourself: Are there ways you can cut your costs for certain parts of your business? It’s well known that during hard times, great opportunities arise. Be confident about your business and stay alert for new business opportunities that can help your business grow. Be flexible and willing to adapt. Having full knowledge and control of your financial situation allows you to see these possibilities faster than others and quickly evaluate if the risk is worth taking. Keep in mind, your ability to adapt to change is what will determine your success.

6. Take advantage of technology

Recession forces business to become more efficient. Costs are reduced, unnecessary processes are cut-off, and high margins are important. Technology is a great resource to enable such optimization and frees up your team to focus on strategic activities while allowing technology to take over operative tasks. Incorporate software, integrate your business with new applications, and add payment portals that will speed up and automate processes. Take annoying and time-consuming tasks away from your team, and put them in charge of thinking analytically and helping the business thrive. Think of each and every team, not just your core operation team. For example, invest in softwares that will help your accounting team keep track of your invoices and account receivable, improving your turnover and allowing your accounting team to focus on more important tasks than following up with unpaid invoices.

7. Keep cash on hand

To survive a recession, one of the most important rules is to have quick access to cash. This is true for any business, but particularly for those in the construction industry. As a matter of fact, cash is key even when there is not a recession. During tough times, cash will provide you both acquisition and negotiation power, allowing you to keep your operation running during a recession and respond to unexpected situations fast. During economic downturns, cash becomes more valuable. Remember, companies don’t die because of a lack of capital or revenue; companies die because of a lack of cash flow. Prepare your business by having a healthy cash flow and keep a reserve you can quickly access when needed. Having a cash reserve doesn’t necessarily mean having it under your mattress, ready to be spent. It means having alternative sources where you can quickly access that cash when needed. BlueTape is an alternative that can provide this resource for your business. Create your account, request a pre-qualification of your business, and make yourself comfortable using the product. That way, when hard times come, you will have an easy go-to alternative that will help your business stay afloat, and you’ll have a full understanding of how it works beforehand.

8. Train and involve your team

As important as it is that you know and understand your business, it’s important that your entire team does too. Involve them and let keep them up to date on the situation of your business so you can all work together towards a clear goal. Identify gaps in their skills, train them, and invest in having a strong team that will have the ability to successfully confront a recession. Know the strengths and weaknesses of all your employees and use them to your advantage. Having a strong team that knows and understands your business will give you a competitive advantage during a recession. Don’t forget about them during hard times. Keep in mind they also have fears and their families are also going through hard times. Communicate and give them realistic expectations. Let them know that with a strong work ethic and good teamwork you will all thrive through recession together.

9. Accept there will be loss and don’t panic

Recession will have costs and losses for your business. Be prepared for them and accept they will happen. Don’t focus on avoiding loss; focus on staying alive and growing your business. Don’t panic about losses; be certain your business can take those losses and still thrive. Use your strengths to bulletproof your business from those impacts and walk through recession with confidence and without fear. Fear is a bad counselor, so don’t allow panic to take over your business and don’t fall into poorly evaluated decisions.

10. Stay up to date with current events

Things will change every day, and as tempting as it is to focus just on your business, don’t forget about the rest of the world. Stay tuned in with economic changes, new policies, and legislation modifications. Understand how they will affect your business, identify opportunities, and get involved when required. Don’t let the world take your business by surprise. Preparing for a recession is something that should be done before the recession actually begins. The effectiveness of implementing preventive measures is substantially higher when done in better times, and sometimes they aren’t even possible to implement during low economic periods. Get started today by booking a meeting with BlueTape, a payment portal and trade credit solution tailored for the construction industry.

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