How to recession-proof your business
29 July 2020
Even in the Great Depression, money was still changing hands. Less. But people were still paying their rent, buying food, getting repairs done, and more.
My point is, trades will always be needed.
Yes, coronavirus has sparked a chain reaction of events that is completely changing the landscape of how we all do business. No one knows how this will play out, how big the hole will be. Signs are, it’s going to be big. This will affect every single business in NZ, including yours, and sadly, some won’t survive.
As we navigate the rest of the year, having a cash buffer is more important than ever. Banks are tightening up and watching their clients closely for any signs of trouble.
After lockdown, some work that was previously solid is now uncertain.
I’m not an economist, but I’m going to share from a ‘tradie business coach’ perspective, 7 things you should know, and be working into your plan now, while you still have time.
1. Downturns weed out the crop
I was talking with a seasoned tradie about this the other day. His strategy: “Don’t waste a good recession.”
Sure, it’s harder to get work when times are slow. However, everyone is in the same boat.
Your competitors who are doing a poor job, pricing too cheap, taking the quick buck and burning their reputation? Many of them will disappear. Ultimately leaving more room for you.
The top tradies always have work. In any industry, the best are always in demand, regardless of what the market is doing.
It’s a chance for you to get better, more efficient, become leaner and resilient. Systemise your operations. Sharpen yourself up for the next phase. When things bounce back, you’ll be ready to dominate, and have less competition.
2. Those who are slow to react are the worst hit
Listen up, because this one is important: You MUST be proactive with decision-making. Watch the numbers closely. Look for the early signs so you’re not surprised.
Don’t rely on backlogs of work that may dry up or disappear. Make sure you are doing all you can to keep the work flowing in.
If your efforts aren’t reflecting, and you need to cut overheads and possibly staff, as painful as it is, do it early. Not after you haemorrhage a heap of cash first.
Identify options ahead of time. Have a Plan B for all scenarios, such as an overdraft facility or cash buffer in the bank.
3. Some of your customers will go broke
Have you ever been stung by a large bad debt? Most tradies have. That’s in the good times. It’s even more likely to happen in a downturn.
I often see tradies rely too much on one or two big clients. It’s risky. As a rule of thumb your biggest client ideally wouldn’t be more than 30%-40% of your business.
Assess now: If your biggest client disappeared, would you still be OK? We’ve all seen bigger companies fold and little guys get hurt.
Don’t let it happen to you: Make sure you aren’t carrying late payers, and have solid terms of trade.
4. Never stop marketing
Why should you market if you have more work than you can handle? That’s now. In a downturn, things can change quickly.
Assess: Is your work coming from just one source currently? It’s not a good idea to rely on only one stream to feed you jobs through.
What if your biggest customer had their work dry up? Or went broke, and you had to deal with the receiver who didn’t want to pay you? What if they changed owners? Or their project manager (who dishes out the work) decided he was going to use your competition instead? This can happen (and does).
Especially if word of mouth is the only way you get leads, build a larger number of sources. There are so many different and effective ways for tradies to market their services. Then even if some dry up, you will still have other streams of work.
In slow times, you can also diversify into other types of jobs you can make money on. As well as specialising in what you are really good at. Do both! Spread your risk.
5. Cut the fat
This is something you should be doing at least once a year anyway. Cash is king, and you want as much of it available as you can. Reduce overheads. Work on becoming more efficient.
Reduce debt as much as possible. In a recession, banks tighten up lending and overdrafts. Be aware of interest rate trends and your ability to pay back current debt.
6. Under-pricing leads to problems later
On some jobs, to keep the work, you might have to sharpen your pencil. Be. Very. Careful!
Don’t make the mistake of assuming, if you have steady work, all will be OK. You must know at exactly what point the job is not worth doing. In hard times, lots of tradies will do anything to get (or keep) the work. They are the ones that get into trouble first.
Know your margins. Quote too cheap and you will feel it down the line with tight cashflow and higher debt. That’s not sustainable. There are better ways to win work and keep your margins strong. Even when things are quiet. Even when competitors are under-cutting you.
7. What if your suppliers or bank went broke?!
Those who do not study history are doomed to repeat it.
In 1992, Westpac got into serious trouble and almost went under. In the global financial crisis in 2008 the 4th largest US bank, Lehman Brothers, went bankrupt.
So yeah, these things can really happen.
I don’t know which banks are safer than others these days, but they’re often connected. If American banks end up in trouble again, a chain reaction to the banks downunder is likely.
An experienced mortgage broker told me she’s advising clients to spread the risk by having different banks. One for your home loan, another for the business. Wise advice.
Same with suppliers. Having more than one who knows you (and who you buy from regularly) is a smart move. Suppliers will be cautious of new accounts when things get tight.
Get in touch with your suppliers and ask for longer payment terms. Watch their pricing—if it goes up, be sure to pass along to clients.
As we know, many suppliers now run on ‘just-in-time’ ordering and don’t carry much stock. Figure out how any supply shortages affect you, so you don’t get caught short for upcoming jobs.
Let’s sum up
We can’t stop the recession. But we can prepare wisely.
Carving out time for strategic thinking is key. Because when the economy changes, your approach must also change.
Remember, in a recession there are always opportunities. But most people are too busy scrambling or freaking out, to see them.
My clients, rural builders Barney & Wendy faced a downturn in their region a few years back, and were able to thrive using these strategies. They didn’t have to lay off staff like they had in previous hard times, and came out in good shape. You can as well.
However, trying to do this on your own won’t work. So build stronger connections with your network, your staff, customers, suppliers, and bank. You are going to need them.
It will be a hard road and you won’t have all the answers - none of us do. So make sure you also have a mentor (someone who understands business) to talk to regularly, and work through the issues.
If you already have a mentor - great.
If you need one, then it’s time we had a chat.
About the author: Daniel Fitzpatrick runs Next Level Tradie.
Want some personalised help to figure out what to do next? Go here now.
This article appeared in the June-July 2020 edition of NZ Plumber magazine.