Will You Be Ready When the Economy Picks Up?

Surviving a recession has been compared to surfing. Ideally, you ride the wave of the boom years, always looking ahead toward the point the wave will break, and you make a graceful landing. This means cleaning up your balance sheet, reducing debt, shoring up credit lines and making other preparations to help keep your head above water.

Many contractors endured some painful moments as the wave of the most recent recession crashed onto the beach. But even if your dismount was less than perfect, now is the time to shrug off your bruises and start paddling back out, getting ready for the next wave that will inevitably come.

No one can predict the timing or speed of the turnaround — or even promise that we have seen the bottom of the trough. Nevertheless, we know that companies that recover fastest will be those that can move nimbly out of a defensive posture in order to take advantage of new opportunities. Here are steps you can take now to ensure your company is ready.

1) Take stock of your resources.

Look at your staffing, capital, equipment, and any material inventories, as well as both immediate and long-term liabilities. Ask yourself tough questions, such as, “How much will it take to make my balance sheet attractive to lenders and surety underwriters?”

If your capital base has dropped substantially you may find it necessary to draw on personal resources or bring in additional investors to put money back into the business.

If you have debt that is maturing soon, now might be the time to start refinancing. With reduced local lending authority at many banks, a routine line of credit renewal that once was accomplished in 30 days may now take four or five months, and require a decision from corporate headquarters.

2) Assess potential sources of work.

Formulate a business development plan, starting with your personal knowledge of any projects that were put on hold due to the slowing economy, lack of financing or other economic issues. Talk frankly to owners and developers, and get their firsthand impression of the chances for these projects to re-emerge within the coming year.

You may find some of the key players have changed as owners, developers and managers adjusted to the downturn. So, in addition to sources you already know, be prepared to reach out to new ones.

If you’re a subcontractor, strengthen your network of general contractors to stay abreast of opportunities. Now may also be a good time to selectively recruit executives who have been downsized by other firms, especially if they can bring you valuable contacts and potential new opportunities.

Bear in mind some sectors will turn around sooner than others. Companies at the leading edge of the wave —contractors and subcontractors in the residential sector — felt the effects of the crash much earlier than those at the trailing edge. Thus, they can also expect their recovery “wave” to present itself sooner.

Since the funding cycle for public projects is quite lengthy, many contractors in this sector have maintained relatively stable backlogs throughout the recession, but now see fewer projects being scheduled for commencement in 2010. Because the pipeline takes longer to refill, the public sector is typically the last to recover.

3) Prepare projections and estimate startup issues.

A reliable cash-flow projection will allow you to answer the critical question, “Will I have enough working capital to fund a significant project when it comes?”

Although the surety’s general rule of thumb is that annual volume should be no more than 10 times working capital, this is only a rough benchmark and not a hard-and-fast rule. General contractors can often stretch this multiple since their contracts’ “pay when paid” clauses mean subcontractors temporarily bear most of the burden.

If this recovery follows the pattern of earlier ones, we can expect to see the surety market continue to shrink, even after the pace starts to pick up. This is usually a delayed reaction to one or two high profile failures that required surety companies to step in, causing investor groups to pull back in response.

What this means to a contractor is that capital requirements will probably increase just as opportunities are starting to open up. This is all the more reason to look at boosting your capital resources now.

4) Strengthen key relationships.

Arrange a meeting of all the key players — your accountants, corporate counsel, your lenders, your surety, and anyone else who is a key financial or business partner.

Get a clear understanding of what their requirements and recommendations will be when the time is right. Start talking to them now about the opportunities you hope to pursue over the next 12 months and what they will need from you to help make that happen.

Understandably, some may be reluctant to commit, but having all the key players in the same room creates interesting dynamics. These team members are also each others’ referral sources, so no one wants to be perceived as being reluctant to do business. Moreover, if one key participant is willing to make commitments, it can help increase the others’ comfort levels.

One final note: The steps listed here need not be performed in sequence, or just once. For example, as you strengthen key relationships you may uncover potential new work, which necessitates an update to your business development plan. So be ready to go back and revisit these activities as often as necessary to get ready to ride the next wave.

Porter Keadle Moore, LLP is a founding member of ProfitCrew, an association of accountants and business advisors dedicated to helping construction companies build profitable businesses. For information, contact Adam Polakov at apolakov@pkm.com or visit www.pkm.com.