It has been about ten years since the last recession, and history says that we’re probably due for another one soon. It’s not a question of if, but when it happens. And when it happens, will firms be ready? Personally, I’ve been through three. None of them were fun, and none of them were as severe as the last one in my opinion.
What seemed like a boom in demand for employment in the AEC industry, seemed to dry up overnight. U.S. unemployment climbed to 10% and Construction unemployment was around 25%. Will we see these types of numbers in the next economic downturn? My guess is probably not, but who knows? There are, however, things that can be done to make sure your firm survives when suddenly it becomes difficult to identify work.
Save money now for the storm that’s likely to come somewhere down the road. To me personally, it seemed like the last recession happened overnight. We had experienced years of record profits, and suddenly a lot of work just stopped coming in the door. Having cash on hand can help firms until they can cut their costs to the point where they’re consistently profitable again. A lot of firms have been quite profitable thanks to the labor shortage so now’s the time to think about putting some money away.
Positive cash flow is critical. If a company runs out of cash, and must start borrowing money every month, it could find itself in trouble very quickly. Costs need to be monitored very closely to make sure that the firm is profitable, and generating positive cash flow every month. Keep a close eye on the numbers every month and if profits start to slide, take action before it’s too late.
Rank the performance of your people. The biggest challenge for most firm owners during tough economic times is the fact that the highest costs for any firms is its people. It’s a lot easier to negotiate down equipment leases than it is to start firing people.
In many cases, however, it’s better to cut off a small part of an organization earlier on to save the entire organization versus trying to hold onto everybody, run out of cash, and ultimately be forced to cease operations entirely.
It’s always a good time for firm leaders to determine who they could operate with and who’d be the first to go should the company be faced with a situation where costs need to be cut to sustain profitability and positive cash flows regardless of the market.
Look at all levels of the organization. Principals should not always be immune to layoffs. Are they bringing revenue into the organization? Are they profitable or can they be replaced with someone who is currently doing a better job at far lower costs? Yes, loyalty is important, but survival is even more important. If the firm’s revenue is largely coming from it’s designers and staff engineers, how many non-performing Principals can it support?
Trim the fat now to be as efficient as possible. Many firms have been so busy that they probably don’t even realize where excess waste exists. Take the time to review overhead purchases including supplies and determine what is necessary to run the business. And don’t forget to review employee expense reports to make sure that dollars are being spent wisely.
Be careful about cutting marketing. Spend too much on marketing and see profits go out the window. But spend too little, and see no work come in the door. It’s a difficult balance. Many firms look at cutting marketing first during recessionary times, and often it’s a mistake because in situations where it’s already difficult to win work, lack of marketing often makes it even more difficult.
Fortunately, the Web has brought down a lot of marketing costs and by making it easier to reach lots of prospects creating brand awareness using tools like search engine optimization, online newsletters, press releases, blogging, and social media marketing. That said, I would look at other areas in the firm to cut costs before looking at marketing. The goal is to get more work in the door during recessions, not less.
It’s probably safe to assume that few people, if anyone, wants to see a recession anytime soon. But not planning for one is like putting your head in the sand and pretending that it will never happen. Will it happen next year? I hope not, but uncertainties like the trade war, conflicts in the Middle East, the housing bubble, and the student loan bubble, are all variables that could make the economic outlook in 2020 look a lot different than what it has looked like over the past few years. Plan for the worst, and hope for the best.