September 28, 2022

Real Estate and Construction Industries Prepare for Economic Downturn

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Throughout 2022, economists and financial analysts from around the country have sounded the recession alarm. Nearly fifteen years after the Great Recession of 2008, the pain points and hardships endured by many in the construction and real estate industries are either a distant or vivid memory. As companies have navigated COVID-19, supply chain challenges and labor shortages, leaders continue managing in an environment of excessive uncertainty.

The question leaders should be asking themselves as the recession alarm bells sound is: How can I position my company for success in anticipation of an economic downturn? To answer this question, consider the below:

  • Cash is King – Understand your cash flow situation. A good starting point is understanding your operating costs for the next 3- and 12-month periods. Look for ways to improve your cash management. Starting a conversation with your banker to be proactive about line of credit renewals and possible borrowing base increases will be important for many.
  • Protect your margins – Timely and accurate financial reporting is critical to understanding profitability on contracts. Fluid communication between accounting, project management, and estimating is important to understand any unfavorable trends and respond accordingly. As labor and material costs continue to swell in our current inflationary environment, a better understanding of job costs and overhead costs will be critical to protecting margins in future estimates. It may also be prudent to be very selective in work you decide to pursue, with higher margin work a top priority.
  • Backlog management – While backlogs remain strong heading into Q4 of 2022, there are concerns over the appetite for future deals given the increased costs of projects and increases in interest rates to finance projects. One lesson from the Great Recession of 2008 was projects in backlog schedules may be delayed or canceled; therefore, close contact and communication with project owners are critical.
  • Proforma financials – Prepare and update proforma financial statements with reduced revenue levels. Utilizing analyses of both a 20% and 50% reduction in revenues will put you in a position to model and anticipate actions that will be required during a downturn.
  • Managing balance sheet to position of strength – Consider these actions to strengthen your balance sheet:
    • Cash retention
    • Reduce owner distributions
    • Keep up with receivables collections and retainage
    • Manage your billings in excess/cost in excess of billings ratio
    • Sell off excess and underutilized equipment
    • Protect your line of credit
    • Eliminate stockholder advances and personal items

While this list is not all-encompassing, the items are a good starting point in understanding the mindset required by business leaders ready for an economic downturn.

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For more information on how to best prepare your business for a potential economic downturn, contact our team to see how we can help.

The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.

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