I ran across this article last month, and thought it important enough that I wanted to highlight it in the newsletter. The article is authored by Thomas C. Schleifer, Ph.D., who is a management consultant, author, lecturer and research professor at the Del E. Webb School of Construction at Arizona State University. I’m not sure that anything gets emphasized more at ComNet than the importance of billing and collections. Dr. Schleifer’s article will put the principles of cash management into a broader perspective, and show how it will make the difference for ComNet as we move forward. The economy feels like it’s getting better. Let’s make sure that ComNet is primed to take advantage of the opportunities that will result from an improving business climate.
"In 2008, I predicted the recession would be deep and long. I said so in seminars, but few people believed it. When taking questions from the audience at those seminars, staff from sureties would ask, “Where are the failures?” The failures come at the end of the recovery, I would answer. Now, we’re starting to see more failures. And just as no one liked the recession, some contractors and sureties are going to hate the recovery, too. Companies will fail at a faster rate than anything we’ve seen since 2008. Inflation also will rear its ugly head.
The construction marketing recovery is going to be a financial struggle for most contractors because growth eats cash, and many have been straining financially during this unprecedented downturn.
Contractors, as a result, may have difficulty financing the growth.
I’ve been studying the construction economy during past downturns over a period of 40 years, and what I’ve learned is conclusive. The unprecedented length and depth of the recent market slowdown has produced extremely aggressive pricing, changes in owner attitudes and declining margins. During much of the recovery, margins will remain low because aggressive bidding will continue until the appetite of construction organizations has been satisfied.
The research also confirms that the failure rate of construction enterprises is three times worse during recovery than during the downturn.
This triple failure rate is a sobering, unavoidable fact. Contractors need to be warned and understand how to approach the dangerous period ahead...
To survive the recovery, contractors must avoid losses, keep their capital bases intact and avoid diminishing the equity in their companies. That means they must manage cash flow judiciously during the recovery to remain financially viable and credit-worthy....
Prospering in cyclical markets and surviving both a recession and a recovery in the construction industry starts with recognizing the realities in the marketplace. The results are totally predictable and have occurred without fail in every industry cycle for the past 40 years.
If history repeats itself, contractors will try to regain lost ground by loading up on cheap work, but this will only increase their risk in already difficult circumstances. We cannot control the market, but we can control our response to it." Thomas C. Schleifer, Ph.D.