Stubborn inflation, high interest rates, labor shortages, and lingering disruptions in the supply chain are potential indicators of a looming recession or economic downturn. These concerns affect business owners across all industries, but especially for construction and real estate because during last big recession, 14 years ago, real estate and construction industries were hit particularly hard.
Here are some steps you can take now as a construction or real estate business owner to prepare for a possible economic downturn.
Hold on to Your Cash
Recessions can squeeze cash reserves, especially for contractors that must compete for new business against large pools of bidders. A close look at operating expenses and other costs can help you identify ways to improve your company’s cash flow. Take some time to talk to your bankers about additional credit, if you need it.
Avoid Large Expenses
Along with protecting cash flow, you want to determine which upcoming major expenditures are absolutely necessary and which can be deferred or put off altogether. The more expenses you can avoid in the short term, the more cash your construction or real estate business will have on hand in case revenue takes a dip.
Protect Your Workforce
Layoffs might be a tempting way to save money during a downturn, but they could cause more harm than good. According to the Associated Builders and Contractors, the construction industry needs to attract 546,000 additional workers to meet demand for labor, meaning, the workers you layoff to save money right now, may not be available to rehire or will cost significantly more to rehire in the future.
An economic downturn might also be a good time to maintain your hiring practices because your competitors might shedding workers, and it could be an excellent opportunity to build an especially skilled workforce.
Build and Maintain Your Backlog
As a real estate or construction company, you might see your backlog shrink as the indicators of an economic downturn continue. The more work you can line up, the better you’ll be able to weather whatever happens. A backlog of at least 12 months should be more than enough.
Keeping the work you already have scheduled or underway is just as important for a company as bringing in new business. Stay in close contact with project managers, clients, customers and other stakeholders to make sure the job is running as smoothly as possible.
Stick to What You Know Best
A period of economic uncertainty tends not to be the time for a company to expand its repertoire. Attempting a new trade or venturing into a new market is risky – even when the economy is doing well. Sticking to work with an established track record minimizes that kind of risk.
Look for Federal Contracts
While many types of real estate and construction work might be slowing down, federal contracts are available. New laws like the Inflation Reduction Act of 2022 have made billions of dollars available for a wide range of projects involving areas like green energy.
Stay on Top of Financials
Keeping accurate financial records and statements is never more important than during tough economic times. Costs for labor and materials are likely to continue to increase because of inflation, which will affect overhead expenses and bidding processes. Profit margins may depend on staying up-to-date on market conditions and project progress. This requires regular communication among different departments, with subcontractors and with clients to ensure that everything is moving smoothly.
The better the communication between key people, the faster the company can respond to and fix problems that may arise. This leads to satisfied customers, which in turn leads to a more profitable business.
Pro forma financial statements can help companies anticipate problems and plan for how to respond. Statements that anticipate substantially reduced revenues, for example, may allow a company to identify areas where it can reduce expenses and take other actions to protect and preserve the business.
Corrigan Krause Specializes in Construction Accounting
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