Labor, Inflation, Supply Chain

Companies in the construction industry are facing one of the most complex business environments in the past two decades. Successfully negotiating these challenges requires a combination of skill and careful planning. 

This article discusses five important economic issues we face as business owners in the construction industry. It also provides actionable suggestions to help you emerge from these challenges as a stronger business.

Challenge 1.

Hiring and retention problems

Hiring and retaining key employees is becoming increasingly difficult for companies in many industries, including construction. This situation is driven by employees who are in high demand and looking for opportunities elsewhere. 

The best course of action is to ensure employees are well-compensated, get decent benefits and feel appreciated. This type of environment creates a sense of loyalty. It’s also the right thing to do. Smaller and less financially stable companies are at a disadvantage here. They may not be able to match the compensation packages that larger companies offer and risk losing valuable talent. 

Fortunately, smaller companies have some alternatives. While money is an obvious motivator for employees, it is not the only one. Employees are also motivated by recognition, appreciation and a sense of belonging. Small companies can usually do much better in these areas than larger companies. Working on these non-tangible elements helps you increase retention and employee satisfaction without adding substantial costs.

However, business owners must face the reality that some employees may leave. As a responsible manager, be prepared. Examine your employee roster and determine if any employee is so critical that your business depends on them. This situation creates a serious risk to the company. Every employee should have a backup colleague who can jump in if the primary employee is unavailable.

Challenge 2.

Rising inflation and interest rates

Interest rates have increased and will likely keep increasing in the near term. The effects of these increases will be widespread as general costs and financing rates rise for businesses and consumers. Ultimately, these higher costs can have a chilling effect on consumers and the economy.
Meanwhile, inflation is at a 25-year high. It affects every part of a business and creates a two-fold problem. Costs increase. However, as prices rise, demand for products and services will likely decrease. Companies that don’t respond adequately to this situation will probably get into trouble.
Suggestions to ensure your construction business keeps up with inflation and interest rates: 

• Review and adjust prices regularly. Inflation affects every component of a pricing model. Consequently, review and adjust your pricing sheet regularly to ensure your profit margins stay on target. Otherwise, profits will suffer.
• Update your sales forecast. Inflation affects demand for construction products and services, which affects your sales forecast. Companies that rely on sales forecasts for future purchases and investments must adjust their sales forecasts as market conditions evolve. Otherwise, your team could make investment decisions based on outdated information. 
• Adjust your cash reserve. Every business should have an emergency cash reserve. The current recommendation is to keep enough funds in reserve to cover expenses for three to six months. However, inflation has probably changed all the expense assumptions that went into building the reserve. Consequently, your reserve account must be adjusted for inflation to ensure it is still adequate. Additionally, consider increasing the reserve amount to prepare for possible economic headwinds.
• Prepare for higher financing costs. Getting business financing will be harder, more expensive and will take longer. Financing rates will rise for new credit lines and lines of credit that are tied to the prime rate. Additionally, existing lines of credit will likely see an increase when their term renews. Lenders will also be more careful during their underwriting process, asking for more detailed information and taking longer to issue a line of credit. 

Challenge 3.

Continuing supply chain problems

We have lived with ongoing supply chain problems for the past few years. Unfortunately, some local and foreign suppliers have been unable to adapt and are still having problems running their factories. This problem is aggravated by the high costs of moving freight between countries. Most experts suggest that we can expect supply chain problems to continue for the foreseeable future. 

• Handling supply chain disruptions is notoriously difficult. The recommendations I made in my previous article, “Managing Supply Chain Problems” in the May/June edition of Glass Magazine, can help you better cope with this problem. Key suggestions: 
• Diversify suppliers. Consider working with more suppliers and ensure you have a backup supplier for every essential product. The main drawback of this strategy is that it reduces your purchase volume for each supplier, resulting in lost volume discounts. However, you gain the advantage of having an alternative source if a supplier does not have the inventory you need.
• Adjust inventory levels. Most companies use a “just in time,” or JIT, inventory process. This approach allows them to keep the lowest possible inventory levels that allow for smooth operations and can provide savings and improve cash flow—when it works. Unfortunately, JIT inventory is fragile and leaves you vulnerable to supply chain problems.

A safer approach is a “just in case,” JIC, inventory process. The main difference between JIT and JIC is that JIC builds an inventory cushion into the forecasts. This cushion reduces your chances of running into problems if your suppliers have product shortages. The drawback is that holding inventory is expensive and reduces your available cash flow.

Challenge 4.

Health and geopolitical instability

The broad market is also facing headwinds from the ongoing health pandemic and the developing conflict in eastern Europe. Both events are inherently unpredictable and difficult to manage. 

Consider tracking how these situations affect your suppliers. Unfortunately, these issues feed into a vicious cycle with the supply chain and cost inflation. The supply chain could be further affected by closures, freight delays, fuel shortages and cost increases. 

Challenge 5.

Possible recession

The economy is facing pressures from several directions. The unfortunate consequence of this situation is that we could experience a recession. As I write this article, there are several news stories with public company executives warning their investors about a possible downturn and preparing accordingly. You may want to consider doing the same by implementing some of the strategies we discussed earlier. 

While no one ever wants a recession, it can provide growth opportunities for companies that are well-prepared. Periods of turmoil enable savvy business owners to grow their market share and emerge stronger. Consider these two strategies:

• Grow your client base. Well-prepared companies can use a recession to build their market share strategically. While competition increases during recessions, fewer companies can deliver the level of service clients expect. They may not have adequate staffing, inventory or financial resources to deliver. A well-prepared company is also positioned to win these opportunities. This is your opportunity to differentiate your company. Furthermore, these customers will likely remain with you once the economy improves. This expanded client base leads to new opportunities.
• Grow through acquisitions. Recessions also offer the possibility to grow through business acquisitions. Turbulent markets can present a great opportunity to seek and acquire value companies that are attractively priced. 

We face an interesting opportunity. Small company valuations are usually based on a multiple of the Sellers Discretionary Earnings, among other factors. Sellers, buyers and lenders determine this figure by evaluating the last three years of financial statements. However, the last three years have been difficult and have pushed revenues down. Consequently, some valuations are also down. This scenario can be an opportunity to buy out an owner who is ready to retire or make a change.

Keep in mind this strategy can be a double-edged sword. Well-executed acquisitions can help you grow your client and talent bases. However, they are hard to pull off. On the other hand, poorly executed acquisitions can easily get your company into serious trouble.

See Other Recent Financial Management Articles from Marco Terry

• Managing Supply Chain Problems
• Are You Planning to Sell Your Company?
• To Buy or Not to Buy