Contractors: Tips for Managing Through a Downturn
Estimated read time: 3 minutes 30 seconds
Many economists predict that a recession may come toward the end of 2023 or early 2024. This is not welcome news, especially for construction companies and contractors. The reality is that the industry has already weathered its fair share of market ups and downs, and the coming year appears to be filled with even more uncertainty. With another economic downturn possibly on its way, there are steps construction contractors can take now to optimize operations and manage cash flow more closely. To help clients, prospects, and others, JLK Rosenberger has provided a summary of the key details below.
Preparing for a Downturn
Savvy construction contractors will be looking for ways to preserve cash, seek out federal projects, and shore up their backlogs.
Closely monitoring financial performance is key for construction contractors in any economic climate. Before and during an economic downturn, it’s a necessity.
“If contractor leadership is convinced that a downturn is coming, the primary goals are to preserve cash and to shore up financial relationships,” said Anirban Basu, chief economist at Associated Builders and Contractors. “This represents a time to determine whether the firm can cut costs and whether it makes sense to attempt to negotiate larger lines of credit.”
Unless necessary, it’s a good idea to hold off on large capital purchases. Monitoring accounts receivable, accounts payable, and taking proactive steps to mitigate risk will also be important.
- Keeping more cash on hand can be done in a few ways:
- Issuing invoices quicker and on a more regular basis, with potential incentives for early payments
- Negotiating better payment terms
- Developing more accurate estimates of job costs
- Financing fixed assets and other materials where it makes sense versus paying cash
Cash flow forecasting is also critical. Cash flow reports can produce an accurate picture of how much is available at any given point. Instead of conducting quarterly or yearly forecasts, one method to consider during a downturn is the 13-week cash flow model.
13-Week Cash Flow Forecasting
The 13-week cash flow forecast is a short-term planning tool that any company can use during periods of uncertainty, transition, or financial distress. It can be used as part of a more strategic cash flow approach, though the short-term nature of the model focuses on immediate needs and opportunities.
There are many advantages to using this tool, even if the company isn’t experiencing liquidity problems. It can:
- Help to avoid potential cash shortfalls in the near term.
- Uncover cash flow issues before they become a problem.
- Identify potential opportunities.
- Predict short-term cash needs with more accuracy.
The short-term nature of the forecast does mean that it takes more time and attention than typical quarterly or yearly forecasts. Building out the model in Excel may require some assistance since any errors in the formulas can break the entire template. An advisor can also help to collect and analyze existing data.
Construction leaders need to update the forecast weekly and regularly meet with stakeholders to review the results. It also won’t solve long-term financial problems without more direct intervention. And if the contractor doesn’t yet have the inputs for the model, that can also take time to compile.
The good news? Having a better handle on all costs and revenue lines will result in a more financially sound business better prepared for any downturns. In practice, the 13-week cash flow forecast can inform decisions on financial and operational processes and partners. For example, the contractor may see that it’s better to sell certain assets, defer some purchases, or delay supplier payments. Or the forecast may reveal the need to negotiate better terms with lenders or seek additional financing.
How to Build a 13-Week Cash Flow Forecast
The inputs required to build the 13-week cash flow model vary from one contractor to the next and generally include the following elements:
- Operating cash receipts and disbursements, like revenue from invoices and payroll and material expenses
- Non-operating cash disbursements, like interest payments, capital investments, and beginning cash balance
Historical data, any existing forecasts, and income statements are rolled into the template. The contractor will need to make assumptions about the timing of some payments, which can be difficult in construction. The closer the estimate is to the actual transaction, the more accurate the weekly forecast will be.
Integrating the 13-Week Cash Flow Model
The 13-week cash flow model can be recycled every few months until the contractor has a pulse on short-term cash flow needs and opportunities. It can be used to shore up cash flow ahead of or during a recession and help the contractor weather a downturn. It’s not a long-term strategic financial planning solution, though.
When used in conjunction with longer-term forecasts of one year or more, the contractor will know what’s available now, which direction to go in the future, and how to get there. Especially during uncertainty, both short- and long-term planning are needed for the most informed decisions.
While it is possible that economic conditions may continue to present new challenges for contractors, certain steps can be taken now. For this reason, it is important to consult with a qualified advisor to evaluate your situation and determine the best way forward. If you have questions about the information outlined above or need assistance with a tax planning or cash flow management need, JLK Rosenberger can help. For additional information, call 949-860-9890, or click here to contact us. We look forward to speaking with you soon.