Investing in Construction and Preparing for a Recession

February 15, 2019

Construction

Toronto Construction

Since the last recession in 2008, the construction market has seen gradual changes in both downturns and upswings. There are legitimate fears that we are on the brink of another recession even though we are in the midst of the second longest growth cycle in history. It has been underway since March 2009 and is only beat out by the growth cycle between 1991 to 2001. The construction industry has usually mirrored the highs and lows of the stock market, which is why investors and entrepreneurs should look to it as an indicator of fluctuations in the business cycle.

Historically, recessions are sparked by events that cause financial markets to go into a frenzy, such as the mortgage crisis of 2008. Economists fear of a similar incident occurring in the next year or two stemming from added tariffs on Canadian goods and general market uncertainty. Some businesses are already putting off investing because of this uncertainty, which could slow economic growth. While everyone in the construction industry hopes for current conditions to continue, you should still prepare for the inevitable as an owner or investor.

While an imminent downturn in the markets might signal the perfect opportunity for investment, now is as good of a time as ever to invest in the construction sector. The current industry is on the verge of heading into a different direction than the one that has been around for the last decade or so. There is a lot of room for startups, and forward-thinking investors are taking notice. More people are noticing a need to invest in construction technology, which is bound to change the game. There are many opportunities to digitize this sector to increase productivity and, in turn, profits. The building industry is an exciting one to be a part of given the impact you can have on it.

Recessions are a normal part of every economic cycle. Contractors should prepare their company for any financial condition to ensure business continues to grow, and investors stay happy. There are some strategies you can adopt to help make your business recession-proof.

You can start by identifying profitable niches and replicating them. Cease operations of unprofitable divisions that might be disguised as successful endeavors. Get down to the core of what makes your business unique and successful compared to similar ones, and allocate your finances accordingly.

Avoid over staffing, even if it is tempting to do so. Especially avoid hiring more people if their role will be to support less profitable ventures you have identified above. You will save money on payroll taxes, benefit expenses, and workers’ compensation premiums. Hiring too many people or the wrong kind of people is a common mistake contractors make that can be costly.

Conserve cash by not paying bills too far in advance before they are due. You can make an exception to this rule if you are offered a discount for paying early or if you can negotiate a discount for future installments. If there is no incentive to paying early, then hold on to your cash for as long as possible.

Keep entertainment expenses to a minimum. While premium seats seem like a worthwhile expense in a strong economy, they can become a burden when business slows down. Buy premium seating for a few games, if this is important for key customers, instead of buying premium seats for an entire season. That way you can maintain your business without going overboard on expenses.

Keep overtime to a minimum as well. While having workers do overtime is a better option than overstaffing, it can still eat into profits rapidly. Use overtime hours sparingly and be diligent about tracking them. You may be surprised by how much money is being wasted in this area.

Spend on automotive practically. If you are leasing or purchasing trucks on four or five-year contracts, the payments towards the end will be difficult to make if there is a sudden downturn in the markets. This situation is made that much worse if you have partners or employees who overbuy. At the end of the day, employees would rather drive a standard vehicle for a decade than a luxury truck for two years and end up without employment.

Secure a line of credit – just in case. More contractors are better off financially now than they have been in more than a decade. It is easier to establish a line of credit or increase a current line when your business is doing well. That way you will have funds available if business slows down.

Sell unused inventory and trivial assets.There is a market for everything in today’s economy. Unload superfluous inventory or assets like equipment, trucks, etc., for a reduced price while you can. There could be no market for these items if stocks head south, rendering most of it worthless. The longer you hold onto these things, the faster they will depreciate in value. You can also reduce your insurance premiums by ridding your business of unused inventory, giving you more liquidity in your company.

Maintain your professional relationships.Solidifying relationships with clients and vendors could pay off in a lousy economy. While business slows down when markets take a dive, it rarely comes to a standstill. Be amongst the few that not only survive an economic pitfall but manage to flourish in it. Having a base of vendors and customers that rely and depend on your services will mean you will always have money coming in.

Create a marketing budget.Companies tend to spend more on promoting their services when business is doing well because that is when they have more funds coming in – even though it is counter-intuitive to spend more on marketing when you need it the least. It does not make sense and yet it happens all the time. Instead, allocate money for marketing initiatives when you anticipate business will slow down since that is when you will need it the most.

If you practice adequate financial planning, then you should be well-prepared for any market fluctuations to come. All of the strategies above will help keep your company afloat and yield your business even higher returns when things are going well. No economist knows for sure when the next recession will hit, but most predict it is on the horizon. Take the proper steps now to make sure your construction business can weather the next storm. As they say, hope for the best but prepare for the worst.

 

Credit goes to Green Frog Construction – Contractors Toronto

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