It's hard to open a newspaper or watch the news without hearing about the housing meltdown and the effect it is having on the rest of the economy. There are signs that it will affect other construction sectors. The following, often over-looked, strategies will improve a contractor's chances of successfully managing his or her business in tough times.
1. Get to Know Your Lending Agreements and Lenders.
The current downturn in real estate has spread throughout the economy, causing tougher lending standards throughout the construction industry. Contractors need to get ahead of this curve by reviewing capital requirements and bank covenants against their business plan for 2008 to ensure that compliance issues are predicted and re-negotiated ahead of time. Lenders hate surprises. If possible, negotiate a larger credit line to provide a cushion even if it means giving additional collateral or guarantees. These can be re-negotiated when this business cycle turns around.
2. Take Full Advantage of The Economic Stimulus Act of 2008.
The president and Congress put their differences aside long enough to enact the Stimulus Act on February 13, 2008. A central feature of the Act encourages capital investment by businesses by bringing back "bonus" depreciation, which allows up to 60 percent of equipment purchases to be written off in the first year. Contractors should take full advantage of this tax break, if the equipment is needed, by purchasing and placing into service the asset in the calendar year of 2008. The equipment must be new to qualify. There is also an expanded expensing option under Section 179 of up to $250,000 and that tax break is available for both new and used equipment, subject to phase-outs for larger contractors. These deductions are allowed for alternative minimum tax purposes as well.
3. Update Your Business Plan, with Recession in Mind.
Re-evaluate every aspect of your business plan from a new point of view-how it should change if the economy takes a sharp downturn in 2008. Every contractor should go through the exercise of running financial projections that model what happens if your revenues are 10 or 20 percent less than in 2007. Look critically at each business line to see if this is the time to exit those that are marginally profitable or unprofitable. If your business is considering expansion into a new line of business or a new geographic area, consider partnering with an existing business to minimize risks.
4. Retain your key people.
If you think times are tough, think about how they would be without your key people helping you manage your business. Every contractor should take aggressive steps in the areas of reward systems to make sure that your key people feel appreciated and well cared for. Most surveys show that compensation, while important, is not in the top two or even three critical factors in job satisfaction. Look at compensation as a qualifier that keeps your key people from looking around, but then look to earn their loyalty through innovative benefits, deferred compensation, team building and participation in plotting the strategic direction of your construction company.
5. Evaluate Your Bank.
Contractors should critically evaluate the strength of their bank and that bank's knowledge of and commitment to the construction industry. When credit tightens, banks that do not have a deep commitment to contractors may pull back from an entire industry, regardless of the underlying credit-worthiness of their customer. Be prepared to move banks before that happens.
6. Control expenses by out-sourcing.
Having resources in-house can be an expensive luxury. Whether it is technology, fleet management, human resources or a host of other skill sets, contractors should look to out-sourcing to reduce risk, reduce costs and increase efficiency.
7. Watch for Acquisitions.
Contractors in financial trouble often step on the accelerator during a recession by bidding work cheaper and managing their risks more loosely. Contractors who have a solid financial base should be alert for acquisition opportunities, not only for their competitors who are facing liquidity issues but also for expansion or other purposes. Competitors may be available at bargain prices, or they may be forced to liquidate assets at less than fair market value.
8. Beware of short-term investments.
Overnight investment of excess cash has become significantly more complex as auction rate securities (corporate or municipal bonds with long-term nominal maturity or preferred stocks for which the interest rate or dividend is reset by an auction agent through bid process known as "dutch auction"), once thought to be as liquid and safe as a savings account, routinely fail in auction. Contractors need to reassess the safety and liquidity of any short-term investments, particularly cash equivalents.
9. Review spending.
In this environment, contractors should closely review any expenses that are discretionary for opportunities to defer or reduce cash outlays. In conjunction with this, a capital expenditures budget should be reviewed. Equipment purchases that can be delayed without hampering ongoing business should be considered, but also see No. 2 above for tax breaks allowable only in 2008.
10. Actively manage employee benefits.
Once thought to be a fixed expense, contractors are awakening to the fact that they can reduce costs and achieve the same level of employee satisfaction with their benefit package by re-evaluating how those benefits are delivered and packaged. For example, health savings accounts may be an attractive option to your workforce. At the very least, re-visit cost sharing and funding of benefit levels.
Follow these ten tips to ease your stress during challenging business years.
Construction Business Owner, July 2008
