Navigating Stormy Seas
Thomas C Schleifer, Ph.D
The Fed has just imposed another 75-basis point increase in its benchmark interest rate, and now even both sides of congress are howling. Prognosticators are worried that continued increases will push the economy into recession. Contractors find themselves between a rock and a hard place. What to do? Be aggressive while there is still work out there; or tighten up now before recession sets in. In other words, it’s time for contractors to think about a brandy, sit back, and engage in strategic thinking.
Every time I use the term “strategic” in my seminars a soft groan goes up from the audience. A lot of construction professionals consider “strategic thinking” academic speak which tends to make them restless. On the other hand, a lot of successful contractors I have known eventually buy a boat. Perhaps a nautical metaphor will speak more clearly when it comes to strategic thinking.
- When an experienced captain finds him or herself in choppy seas they don’t stare down at their compass and adjust the helm every time the needle moves off their plotted course. Rather, they gradually nudge the helm toward a point on the distant horizon or a celestial object. They know where they want to go and don’t let every small nudge on the bow cause them to oversteer. They batten down the hatches, steer a true course, and never lose sight of their intended destination. They are engaging in strategic thinking. You may have done the same thing if you were ever lost at sea.
Batten Down the Hatches
In the choppy waters of this post pandemic economy, construction professionals are struggling to stay the course and not get distracted by every nervous economic prediction. In stormy seas, the reliable captain “battens down the hatches” to stabilize their vessel and stay on course. Construction organizations in this post-pandemic disorderly economy need to “batten down the hatches”, stabilize their company, and wait till this economic storm passes.
In Search of Excellence
By “stabilize” your company I mean set a goal of “excellence” in all company functions and spend the next two to three years implementing those goals. The reason is that if it turns out that there is less work around, maximizing performance on the work you have becomes critical. The five most immediate goals as we navigate this choppy market are:
- Shore up your balance sheet. The most powerful tool in a contractor’s kit during down markets is a strong balance sheet. Few contractors enjoy public financing in the form of cash for stock, so rarely do contractors have an excess of cash on their balance sheet to see them through downturns. For the next two years, task your CFO with improving liquidity by aggressively collecting accounts receivable, eliminating capital expenditures, and trimming overhead to fit existing business activity. Free cash flow is the most important financial measure during stormy weather.
- Improve employee relations. There is no more valuable asset when things get tough than an experienced, well-trained, loyal workforce. Do not rely exclusively on human resources or “commoditize” your workforce that has partnered with you to build your business. Interact with and respond to employees throughout your organization regularly and learn to listen. Personally welcome new workers at all organizational levels and invest in in-house training programs that maintain and improve productivity and can satisfy any “natural” attrition.
- Improve customer relations – Your objective is to become the contractor of choice in your market area. Owners and designers will designate your firm their “contractor of choice” only after you have completed multiple jobs for the same owner on time and on budget. Stop all expansionary “low-bid” work outside your normal market. The appetite for growth at any cost becomes “too costly” in reputation and in down markets your firm could be left off preferred bid lists.
- Improve vendor relations – In this post-pandemic disorderly economy whipsawed by rampant inflation and impending recession, good relationships with your vendors and material suppliers will be an essential stabilizing factor. Paying on time, and being known for it, will go a long way in enhancing your reputation with vendors and grease the skids if or when relaxed payment terms are needed to smooth cash flow. Being moved to the head of the line when short supply rears its ugly head depends on your ongoing relationship with your vendors.
- Reimagine job selection – Do what you do best. Resist the (ego-maniacal) corporate self-image of “we can build anything” that leads to overextending both your workforce and your finances.
There is no overacting even if a recession does not occur because it takes so long to prepare to prosper through a market downturn. With a viable “threat” of a recession, prudence demands preparation. (In fact, world class construction enterprises are continually prepared for a downturn, but that is a whole other level of sophistication to be addressed at another time.)
Watch This Space
Next week we’ll discuss in more detail how to implement number one – Shore up your balance sheet. There is a step-by-step process to improving “free cash flow” that will stabilize your company in the rough seas of this whiplashed economy. Be sure to tune in.
For a broader view into strategic thinking, read more here: STRATIGIC THINKING
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