Three Things Contractors Should Do before the Next Downturn

Michael Kapics, CPA, CCIFP, and Construction Industry Group Leader for HBK CPAs & Consultants, would like to share the following article written by Brandon Dougherty, CPA, which highlights several important recommendations to assist contractors in maneuvering through turbulent economic times.

In times of economic prosperity, contractors tend to be less concerned about surviving and more prone to taking unnecessary risks. But it is in times of relative security that business owners are in the best position to prepare their companies for the inevitable less prosperous times.

Set Realistic Expectations for Growth
In bull markets, many business owners take advantage of improved margins and increased cash on hand to grow their businesses. While their overall growth strategy might be sound, the implementation of an effective strategy is imperative to ensure that the expansion does not negatively impact the company’s liquidity. Rapid expansion into new, unfamiliar geographic areas or service lines can be disastrous if not carefully planned. Entering new markets can lead to losses in the new initiatives and put additional stress on established operations.

Further, significant increases in the size of individual projects, whether in a new geographic area or a new service line, can appear attractive on the surface because revenues are likely to increase. But higher revenues do not necessarily translate to higher profits. Especially if a company is unfamiliar with the licensing requirements and regulatory environment in a new state or municipality, what sounded like a great idea around the boardroom table, could ultimately destroy what the owners have built through years of dedication and hard work in their field.

When planning for expansion it is essential that the business take a deliberate, measured approach to ensure that the new enterprise does not negatively affect the existing operations. Realistic growth plans typically extend 12 to 36 months and allow the businesses to evaluate and react as things unfold during that time.

Invest in Your Human Capital
Another leading cause of contractor failures relates to performance and personnel issues. A lack of skilled labor has impacted many of the nation’s contractors. While this can make a successful expansion nearly impossible, it is also a struggle for many businesses just trying to maintain their existing levels of operation. Inadequate training or experience, as well as an insufficient quantity of personnel, can halt a growth plan in its tracks. A strong business invests in its workforce through formal, on-the-job training at all levels, and develops a culture of loyalty, ownership, urgency and accountability.

Prudence in Prosperity
Maximizing distributions to owners, deferring the reduction of debt, and other policies that erode a strong financial foundation can squander a company’s opportunity to truly improve its financial footing. Contractors should avoid big-ticket items like planes, boats and equipment unnecessary to the business, as the cost and upkeep of such items can be burdensome when cash flows are tight and margins are compressed by an economic downturn. Resale values are also typically substantially depressed during down markets. Instead of splurging on non-vital items, business owners should invest a portion of their profits in short-term, liquid investments as a way to ensure future cash flow.

Create a Long-Term Succession Plan
Succession planning plays a huge part in the long-term viability of a company. Retirements, unexpected deaths, or other changes in leadership can result in a shift in focus that can lead to abandoning ways of doing business that led to the company’s success. With no plan to ensure continuity in the event that a death or disability could cause a change in the culture, key staff members could become disgruntled, and some of them might ultimately leave a business at a time when they are needed most.

The topic of succession can be an unpleasant conversation, but it is critical for owners of small and medium-size businesses to have a plan in place for what happens when they move on, by choice or otherwise. Having a trusted advisor knowledgeable about succession planning can ensure a thorough and objective analysis of all factors.

Economic downturns, national or local, external or internal, are inevitable. Informed, thoughtful planning is the best way to ensure your business will survive the next one. For questions, please contact Brandon Dougherty of HBK’s Construction Industry group at BDougherty@hbkcpa.com