Are slow times coming for tradies?
As I write this in early March, Coronavirus has started a chain reaction of events, including shortages of some products. Public events are being cancelled.
Banks are worried and are watching their customers closely. The economic environment is changing. Time will tell how it all plays out.
If you’ve been in business a while, you’ll recognise there are always ups and downs. Some bigger than others. It's part of the economic cycle. It’s part of being in business. However, it’s important to ensure you’re ready.
Are you prepared for what's coming next?
Here’s 7 things to know:
1) Downturns weed out the crap
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 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
A lot of tradies I talk with are busy. 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 jobs through.
What if your biggest customer changed owners? Or their project manager (that dishes out the work) decided he was going to use your competition instead? Or they went broke, and you had to deal with the receiver who didn’t want to pay you? 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 good at. Do both! Spread your risk.
5) Cut the fat
I mean, 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 your ability to pay back current debt.
Interest rates could go up. In the ‘80s, they got as high as 20%.
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 okay. 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 undercutting 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 be aware that they’re often connected. If American banks end up in trouble again, a chain reaction to the banks down under 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, and another for the business. Wise advice.
Same with suppliers. Having more than one who knows you (and that you buy from regularly) is a smart move. Suppliers will be cautious of new accounts when things get tight.
Also, keep your account paid up to date, so you have a good track record if you need more credit in the future.
Many suppliers now run on “just-in-time” ordering and don’t carry much stock. Ask them how much stock they have of the materials you most often use. So you don’t get caught short.
Let’s sum up
In slow times, things become unpredictable. What worked yesterday doesn’t work the same today.
Principles will always stay the same (like don’t carry unnecessary debt). But strategies will change to the circumstances (like which customers are risky to deal with, e.g. if they are likely to become over-exposed).
Make time your friend, not your enemy. We all have 24 hours in a day. Business owners who carve out time for regular strategic thinking will see the opportunities and take advantage of them.
(In a recession there are always opportunities. But most people are too busy scrambling or freaking out, to see them.)
You can’t do it alone. Build strong connections. That includes staff, customers, suppliers, bank, and bringing in the right expertise at the right time.
No one knows when a downturn will happen, but history tells us it certainly will. It’s not about if, it’s about when.
My clients, rural builders Barney & Wendy faced a downturn in their region 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 great shape.
Prepare well, and don’t stress. Even in the Great Depression money was still changing hands. Less. But people were still paying their rent, buying food, getting repairs done.
If the pie is smaller, just take a bigger slice.
by Daniel Fitzpatrick
Next Level Tradie
Daniel Fitzpatrick is a business coach for trades & construction business owners. Find him at NextLevelTradie.co.nz
Want a fresh pair of eyes on your situation? Need a custom-built plan to figure out what to do next and how to respond? Go here to book a free no-strings chat: www.nextleveltradie.co.nz/nextstep