Some forecasters a predicting an “Capra-esque” 2023, while others are certain we are smack-dab in the middle of an M. Night Shyamalan plot. Some even think that since the pandemic is waning and that the Ukraine war is at a stalemate, this inflation fueled economy may be short lived. The problem with letting the feelings of optimism in is that we risk taking our eye off the ball. We begin to minimize the dangers of this economy and start seeing opportunities. In other words, accurate risk assessment may go out the window.
In this first series of messages for 2023 we’re looking at how to professionally manage a construction firm’s capital position to ensure enough liquidity to see the firm through an inflation/recession economy that can threaten reliable cash flow. The amount of money required to run a business varies by company and industry. For a closely held construction company, the exposure is that it can cease operations very quickly if it runs out of cash and credit.
After New Year’s, prognosticators gave up pretense and predicted recession for 2023. The Fed, they now admit, waited too long to take action and its current aggressive interest rate hikes are pushing the economy into a recession while not yet tamping down inflation to their acceptable level (2-3%). In other words, contractors will likely have to navigate an economy in 2023 plagued by both inflation and recession.
Welcome to 2023. The turning of the calendar page is an artifice that has taken on unrealistic significance. We’re all happy 2022 is over and believe that 2023 will be a “new year”. In business, that of course is nonsense. Life unfolds in a continuum of cause and effect from one day to the next. What happens in 2023 will be a result of what we did in 2022; no more, no less.
American industries have had (and are still having – think the tech sector or big pharma) phenomenal growth due to capitalization by Wall Street. The construction industry is unique in that is has not been (for the most part) financed by public equity. So, when faced with a future of rampant cost inflation how can construction companies stay solvent? The answer is in a competent CFO who can estimate the “capital capacity” to keep your construction concern solvent.
The construction business is one of the most complicated enterprises in the world. Is the valuation based on current projects, past projects, or future projects? What is the “Sales-To-Total Assets ratio? There is so many variables in this business it is surprising that many knowledgeable contractors tend to use their “gut feelings” as a barometer for performance and are surprised to find out they had run out of cash. For the bumpy road ahead in 2023 and 2024, a savvy contractor will need to utilize their CFO and pay attention to their financial reports.