Creating a plan for an inevitable recession will help save your business.
This article was originally featured in the January/February 2020 issue of Construction Accounting and Taxation
As a construction business owner, your company is your golden goose, your pride and joy. To grow and nurture it, you worked countless hours and sacrificed time with family and friends —not to mention forfeited sleep. When you see the axe of a recession swinging down on your goose’s head, you will do anything to make sure it survives. As discussed in Rock the Recession: How Successful Leaders Prepare for, Thrive During, and Create Wealth After Downturns, keeping your golden goose alive in a downturn is your top priority.
Although your company’ s survival is number one on your list, it does not make tough decisions, like laying off valued employees, any less difficult. The hard truth is that you simply are not going to survive without a lot of pain unless you have a written plan in place to deal with hard choices. We call that plan an “emergency brake,” a tiered system of cuts to be activated when certain predetermined metrics are reached.
In this article, we will explain why you need these tiers in place before a recession strikes and how to define them for your construction business so you can weather the downturn with minimal damage and pain.
Why you need an emergency brake
You might be thinking, “My business is recession-proof; I don’t need an emergency brake!” Maybe you do already have a solid plan in place to get you through the next recession, but it is impossible to control all the factors. Therefore, every thorough recession plan needs an emergency brake.
It is a failsafe that could save your business from catastrophe in a worst-case scenario in the same way an emergency brake saves a careening, out-of–control train. Sometimes, things go off the rails and the best thing you can do is prepare ahead of time to minimize the damage.
The beauty of having a tiered emergency plan, which means making cuts commensurate with how bad the situation has become, is that it eliminates the stressful, sometimes heart-wrenching decisions that leaders usually have to make during these times. Because everything has been laid out in advance, there is no uncertainty bout what needs to be done. All that remains is to execute the plan if and when the time ever comes (and recessions always come around).
If you set your tiers strategically, you will stay calm and not be tempted to make any rash (not to mention dangerous and illegal) decisions like committing insurance fraud. Fear and uncertainty can cripple you and your business in a downturn and cost you a lot of money, which is why you need a plan for when you are going to pull the emergency brake.
The best time to start creating your plan is now, so let us take a look at how to define your tiers and the triggers that activate them.
Find your canaries.
To set your tiers, you first need to figure out how you are going to know trouble is approaching. Every organization is different, which is why you need your own custom canary in the coal mine.
If you are unfamiliar with this expression, it comes from the days when miners literally took a canary down into a mine. They knew that if the bird fell off its perch, it meant there was too much carbon monoxide, and they had better make a quick exit.
Your canaries should be the metrics in your business that are most likely to change your behavior. There are many potential answers here: revenue, profit, backlog, or pipeline, for example. Choose one or two that have the most impact on your business.
Once you have chosen your warning-sign canaries, you are ready to set tier one.
Tier one. As the first activation point in your emergency-brake plan, tier one gets triggered when you see trouble ahead. It has not arrived yet, but you know it is coming.
This means it is time to eliminate all the dead weight that has accumulated, the unnecessary overhead in your business. It is time to stop making those discretionary donations. Cancel industry journal subscriptions (or let them expire). Reduce vehicle allowances. Limit entertainment expenses. Suspend any country-club memberships tied to your business. Forget about those exotic locations for company-planning retreats. Double up on offices, or sublease half of your offices.
It is up to you to choose exactly when to restrict spending. As an example, imagine you have dropped from 100 percent of your normal revenue to 80 percent, which you chose as the threshold for activating your tier one emergency-brake plan. You start to make these cuts and do away with all the “nice-to-have” expenditures in your business to make up for that lost 20 percent.
You set your tiers in advance, worked it all out with your team proactively, and achieved the necessary buy-in, so there is no confusion or hesitation. Everybody knows that if revenue or income drops to the specified level, the cuts are going to automatically kick in.
If your critical metrics keep dropping, you will want to continue to the cuts you set for tier two.
Tier two. At tier two, your metrics have fallen to the point where, unless you start to brake, you are going to crash. This is where you get into a deeper round of expense cuts. If you have reached this stage, you need to suspend all discretionary expenses as well as any industry conferences you planned to attend. In fact, by now you should be reviewing all expenses, regardless of whether you budgeted for them. Cutting down expenses is indeed important, but you are not just cutting to cut. Rather, it is all about making smart cuts. Cut with a return-on-investment mindset. As you make your cuts, you should simultaneously be increasing (or at least maintaining) your marketing for clients. Your marketing dollars will go further in a recession, so they are worth keeping around for now.
Tier three. If your outlook continues to decline, you will trigger tier three. Tier three is where the tough “people decisions” must be made.
Our philosophy when it comes to laying people off is to “cut deep and cut once.” Do it all in one fell swoop, not in small increments. Make a list of everybody in your company —all your employees, how long they have been with you, and their total compensation (including their salary and all their benefits) — and then rate them as As, Bs, or Cs.
Cut the low performers loose. Tier three is not fun, but there is no way around it. What matters is that you deal with it in advance, not in the moment when you are emotional.
Now for tier four, which hopefully you will never reach.
Tier four. If you have reached tier four, it means your company’s very existence hangs in the balance. In tier four, all remaining staff —A and B employees —take pay cuts. You simply cannot afford to pay everybody what you are paying now. The leadership team takes a 20 percent pay cut. Senior management takes a 15 percent cut, and everybody else 10 percent. These percentages are recommendations to get the conversation started.
Again, we hope you never have to live through tier four. However, you still must plan for it, so that your people can have the important conversations with their families about the possibility of having to take a major pay cut if a deep recession occurs in your business.
Your emergency brake minimizes recession damage.
Planning out your emergency-brake tiers requires some grim hypotheticals, but when a recession hits, you will be glad you set them. It makes all the difference to employee morale and your own sanity when you take a responsible approach like this.
When you have a tiered system, you and your team talk it all through, often years in advance. You practice it regularly. Your people are part of the decision-making and execution. This transparency is what achieves buy-in, protects against rash decisions, and ultimately creates resilience that will allow your golden goose to survive and thrive after the recession.
Ready to take a proactive approach to protect your business from a recession? Now it the time to get started. Jonathan Slain is ready to share insights and a customized plan that you can implement immediately. Put a plan in place now before a recession hits! Contact our team now to learn more.