What are the top signs to look up to get prepared for a recession?
by CUBE TeamAs the economic outlook changes towards what appears to be a gloomy future, the need to assess the upcoming economic condition grows and the importance of business forecasting increases.
Let’s get something straight, one thing you will not be hearing from me is how bad the future is going to be ( I will leave that to the regular news channels) However, that does not mean that we should not be paying attention to how the market changes can impact the future of your business.
The fact of the matter is that a recession, depression, economic downturn, or however you wish to call it is part of history. If you look at the economic data covering the last one hundred years, you can see that these recessions tend to occur every so often and are always followed by incredible economic booms. On the bright side, these cycles can be predicted by looking at early warning signs; therefore, if these economic down turns can be predicted, then you can start preparing for it.
There are many indicators that can help predict an economic downturn, and the following examples are some of the one I have witnessed in the past and can have massive effects on the construction industry.
What are Some Early Indicators?
● Prime Interest Rate: When the prime interest rate increases, this affects the ability for the private sector to borrow money at low cost which then increases the cost of new development. When the cost of a new development goes up, the demand for new buildings goes down; therefore, fewer buildings will be available for you to bid on.
● New Home Sales: One of the first segments in the construction industry to be affected is residential real estate. The increase of interest rates will impact the future mortgages of new home buyers and this decreases the construction of new homes. I know that you are most likely not in the residential market, however, the companies that get affected by this start bidding projects in the commercial arena which increases competition.
● Unemployment Rate: You will start noticing a subtle increase in unemployment rates and this is the result of the early layouts of those companies that are either affected or see this coming. Experienced companies will waste no time making these cuts because they know that the earlier you start making these changes the more cash they will conserve. It is an unfortunate and harsh reality. Now, your first reaction is to start hiring those individuals that have been recently let go; however, hold your horses, you might no longer need the extra help and may very well need that extra cash for your future endeavors.
● New School Registrations: This is my personal favorite mainly because this is public information that is easily available and does have a HUGE impact on what we do. K-12 schools are a big part of a control’s contractor business mainly because every school has a Building Management System (BMS). The school budget allocated for the construction of new schools, or the renovation of existing school buildings, is directly related to how many new students register for the school year. Now if new registrations are down, most likely the budget will be reduced. The great news for you is that you will be able to see the effects of this change twelve months from now.
These changes may or may not have an impact on your company, however, there are a few areas where you can see if your business is affected:
● Volume of Projects Bids: When the economy starts to contract, you will start noticing variations on the volume of projects that you are asked to participate in. This is simple math: less projects mean less opportunities to generate sales. This simple metric is an early warning sign of the direction your company is going, yet it amazes me how many companies do not track it.
● Profit Margin of Projects Sold: The reduction in the sales margin on projects sold can be an indicator that you have more competition. I understand that customers want to remain loyal to you and your business, nevertheless, even the most loyal customer will not pass on the opportunity to make more money if they can. Please bear in mind that we are not talking about an isolated project, this typically happens when you start seeing a decline in the average profit margin of your projects.
● Variation On the Percentage of Certain Verticals in the Projects Bids: For those companies that have diversified portfolios, this might be an interesting metric to measure. Verticals such as office buildings, condo high risers, and hotels might be the first affected by an economic recession, therefore, tracking the volume of project bids in these verticals will yield an early warning sign.
● Reduction of the Total Dollar Amount in Your Pipeline: The pipeline is one of the most important metrics to measure. The volume of projects in your pipeline is a direct reflection on how your future sales will be. An early indicator of an economic downturn for your company is the reduction of your pipeline in relation to the same period of the previous year.
There are probably many more metrics that you can use, and in all honesty the more the better. However, these four have proven to be very effective. Now, it is very important to note that none of these indicators will have drastic changes, in fact the changes are very minimal. In other words, the danger of not tracking them is that by the time you notice the change, it could be too late. This is the same as the metaphor of the frog where the temperature of the water starts to increase little by little. When the frog realizes that the temperature is too high, then it is already too late.
I’ve been through a few recessions already and the only thing I regret is not getting ready sooner. I always say that life favors those who prepare ahead of time and punishes those who are oblivious to the market changes. As the leader of your company you are responsible for getting ready and preparing your team to navigate through those turbulent times.
If you find these tips helpful, and would like to learn more on how our team can help you, please click on the following link to book an appointment: https://calendly.com/cube_sales
Remember to work smarter not harder!
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