Present Moment Management
During Evolving Market Cycles
I have expressed concern since the onset of this pandemic that the construction industry does not recognize the reality of the market downturn that is overtaking us. It is difficult to react to changing market conditions while preoccupied with so many unknowns about this market and uncertainties about the future. We risk an interim period of disruption where we may fail to notice financial foundations eroding, some to dangerously low levels.
During a sudden unexpected market downturn it is difficult to remain positive. The natural reaction to sudden threats in life and in business is fear followed by impulsive defensive maneuvers. If, however, we can pause for a moment and reflect, it is possible to make positive use of a negative business cycle in the following ways:
- If volume is declining, it may be a good time to focus efforts on the best customers, the best type of work and the best people. A downturn can have some side benefits if the company eliminates:
- the customers they don’t want to work for
- the work that doesn’t make money
- the people they can do without anyway
- Volume declines can temporarily improve the balance sheet and cash position (if the decline doesn’t last too long).
- Stagnation is a time to sharpen the ax by improving systems and people. It’s a time to train, fix equipment, change systems and address other project management needs. In a growth phase management is often too busy to concentrate on improvements and in a declining market most managers are reluctant to invest scarce funds on improvements.
In the early stages of a decline the balance sheet ratios and cash flow may improve, but the income statement indicators will begin to show stress for one or more of the following reasons:
- When work slows down, the jobs do also as crews double up or wait for a new job to start. Supervision may also have to double up increasing costs.
- Estimators feel pressure to get work and may shrink margins, use unrealistic productivity figures and other aggressive assumptions.
- Overhead becomes too high for the smaller volume, especially when margins diminish.
- Outside creditors react to the income statement stress, get nervous, reduce credit capacity, require more frequent or more demanding reporting, and tighten terms.
- Companies struggle with reducing overhead, belt tightening, and then more painful measures.
- Field overhead (indirect costs) becomes burdensome as companies struggle to reduce the costs while still trying to run jobs efficiently.
When the construction market cycles downward management needs to take action during the early transitional stage to minimize the exposure to performance erosion that can lead to financial stress in the early stages of the next upward cycle.
Stay in The Present
As we navigate this recession in order to thrive in the next normal business environment, we should take a cold, hard look at the present market conditions and our company’s competitive position under current circumstances. An interim “strategic plan” might be warranted with the following elements:
- Assess the immediate challenges that COVID-19 represents to your company’s workforce, customers, and business partners such as subs, suppliers, etc.
- Address near-term cash management challenges and broader resiliency issues.
- Create a detailed overhead plan to deal with the ensuing slowdown.
- Reimagine the next normal business environment as the economy emerges out of the pandemic recession including:
- market conditions, type of work, size of projects
- makeup of the workforce, new work regulations
- safe working conditions, potential profitability
- competitive environment.
Do It Now
Now is the time to avoid the risks and manage your company under present conditions. With these entirely different market limitations it is critical to prevent the erosion of your financial position which can limit your chances of participating successfully in the next expansion. Abrupt fear-induced decisions can weaken your company’s operating capability. Stay in the present and stay positive. You can only control your future by managing the present.