Bulletproofing Against Downturns

It’s an age-old question all business owners would like to know…when will the next downturn be?

I’ve been thinking about it lately, trying to get my arms around it and make sound business decisions based on the facts. I’ve talked with various experts, explored some different fake news sources, and drawn upon my experience in the capital markets over the last decade. To my disappointment, I failed to come up with the answer. So, I decided to bring in the big guns, the oracle that knows all…

I Googled it.

“When will the next downturn be?”

It took 0.43 seconds for a square 17,800,000 results to come back. I have attached a screenshot of the results:

Apparently, it’s coming ”by the end of 2020.” Actually, scratch that, “sooner than we think.” Actually, s**t, never mind, it’s already “on its way.” We’re all DOOMED!

Before we collectively reach for the bottle, I should state the obvious…no one knows when the next downturn will be. No, not even Google. But, there are a bunch of smart people and not-so-smart people who agree on one thing…It’s coming. It always does.

So, if you are a prudent business owner, now might be a good time to start thinking about bulletproofing your business, or at least creating some lines of defense for when it does arrive. For that matter, one should always be focused on lines of defense, not just now amid the nervous chatter. A purely offensive strategy does not work. As a Texas Tech football fan, I can prove that.

So, what does work? Well, these are a damned good start…

Conserve cash.

Cash is your oxygen if you hit a snag and sales start slowing. It gives you runway to correct course while things in the market are shaking out. I’m not telling you anything you don’t already know, but cash also allows you to capitalize on something else when the downturn hits…to opportunistically look for great purchases when prices are low. To go on the OFFENSIVE. Guys like Warren Buffett are partial to this strategy of value investing. It works better when there is a lot of fear in the market and people are selling below the intrinsic value of assets. As Buffett says, “Be fearful when others are greedy and greedy when others are fearful.”

David Rosen, capital markets expert and owner of Long Grove Capital, an investment banking firm for builders:

Given the forecasted downturn, a prudent short-term strategy might be to conserve cash wherever possible. Tactics could include building fewer spec homes, reducing operating expenses, and delaying the purchase or development of land at current market prices. I would hoard cash and then if there is a steep downturn or panic in your market, look to opportunistically buy land or lots at a deep discount.

Strengthen your client relationships.

This strategy is courtesy of Ed Earl, industry veteran and one of the most popular speakers at the International Builders Show (Ed’s podcast interview with us: Secrets to Happy Clients). Ed says:

When you have built a strong relationship with your homeowner, they become more forgiving of cost issues and more understanding of construction uncertainties, which becomes even more valuable in an economic downturn. In a tight market, homeowners are more focused on value and price, but don’t make the mistake of not focusing on the construction process, which is just as important to the price-conscious client.

Narrow your focus to get on top.

The best businesses in an industry usually survive the downturns, sometimes they even thrive. It’s the rest that lie most directly in the path of the storm. What separates the best from the rest is a complicated subject, but there is one universal thing…

Execute your CORE business.

In our industry, it’s easy to do a bunch of STUFF. Some kitchen remodels here, a spec home there, toss in a high-end custom build, etc. But, usually there is one thing that you are best at. One thing that is the main reason clients come to you. Or one thing that produces the majority of your income.

Do a little soul searching, find that thing if you don’t already know, and shift your focus to fine-tuning it until you are executing it flawlessly. Execution of your core business is not the only thing that separates the best from the rest, but it’s the one thing that is ALWAYS in the equation.

But also broaden your income.

Now it’s time to directly contradict what I just said. In a downturn, it’s nice to have a few cash flow streams, not just from one source. But wait, you just said “narrow your focus.” Yes I did.

You can do both, actually. You MUST first narrow your focus so that your core operation is cranking. After you check that box, it doesn’t hurt to look at a few creative, complimentary income sources to augment your revenue.

You’re already providing warranties on your homes. Can you market and sell ongoing “maintenance packages” to your clients? Maybe it’s a good idea. Maybe not.

Are there any natural trades or functions you already have the resources to do in house? In other words, is there any low-hanging fruit that would be an easy, natural addition? Hammer and Hand is a well-known, high-end general contractor in the Pacific Northwest. They not only survived the Great Recession, they actually DOUBLED in size. One of their primary strategies? They expanded their operations to include a custom millwork shop.

Nail your systems.

Let’s go back to execution. What systems can you be improving? Sheri Allshouse, owner of The Allshouse Group, has seen a lot of builders’ business over her years as a leading CPA to the construction industry. Sheri Says:

As we all look at the basics of watching our overhead costs and lot positions, it is really the time to step-up your networking and work on streamlining your processes. You would be surprised at what additional business you will generate through networking with prior customers, trades, bankers, other builders, etc. Start reaching out to them now and see what opportunities are out there. Also, use this time to make your systems better. I would look at software and systems that give your customers that great experience. Also, I would look at systems that allow you to go from estimate to financials. The most important thing is not to get bogged down in the doom and gloom so that your mind can see the opportunities.

The bottom line to all this…the recessions come and the recessions go, but your business doesn’t have to. You can let it kick you around, knock you down, or you can begin implementing some strategies that will help you not only survive, also maybe even thrive. Good luck and happy bulletproofing!

BTW, if you are looking to improve some of your company’s systems, head on over to the Building Optimal Shop to check out some of our swag to build a better business. Proceeds go to benefit, Exponencialistas, my non-profit investing in entrepreneurs transforming their communities in Latin America.