Without a doubt, we need to prepare for a rough second quarter and hope for the best. Think of the following as one component of your recession action plan.
In the most basic terms, business owners should consider these four important questions:
- Can we get equipment (as some suppliers may have closed)?
- Can we get paid?
- Can we get to the site?
- Can we defer payments or extend credit to preserve cash?
Conducting a Financial Stress Test
As you look to Q2, it will be unlike any other we’ve ever experienced. Almost every trend, historical pattern, and seasonal work schedule will differ from other years. So what can we project in a three-month look ahead?
Some NSCA members report that schools, churches, entertainment venues, retail spaces, and others want projects completed right away to avoid disruption upon reopening. Others have almost no access to the projects they were scheduled to complete in Q2. Each business will be different, but we must step up efforts immediately to determine what revenue we can earn during this period.
Of the work that can be done, what is the anticipated gross profit of those projects? Were they already high-margin jobs or do you see margin erosion? What is your best guess about the impact of the shifting schedule, availability of labor and materials, and other factors you envision to generate revenue and cashflow?
Maintaining profits with a myriad of inefficiencies surrounding the business climate will become a huge challenge. As this situation unfolds and changes daily, the predictability of what we can get done will be a moving target. Focus on your payroll and expense matching, but don’t overlook the additional cost of capital if you aren’t used to using your line of credit. Let’s just do our very best!
Billing for work in progress or even stored materials is a major concern and needs daily attention. Getting paid is just as urgent. Your days sales outstanding report will become a leading indicator for the stress test and drive liquidity over this next quarter. Make sure to keep your lenders constantly informed about your status and need for cash. Many have already reached out, and we also have information from the SBA about available resources.
Get in touch with key vendors right away once you’ve developed your projections. Remember: These are businesses made up of good people who are your partners – and in about the same situation. They may be able to help by extending credit terms. In order for them to stay in business, you must also stay in business.
You will have deep discounts offered like never before to buy materials for inventory, and you will have pressure to keep buying levels up for incentive and spiff programs. I am personally contacting manufacturers that have these programs and encouraging them to extend them rather than enforce buying levels. Be smart about this. Before doing something as a favor to others, remember that your No. goal is to keep your business afloat.
Recovery Period Trend Analysis
This is the probably the least predictable part of all business issues facing us right now. No one knows how long this business interruption will last or how long it will take to fully recover.
During my strategic planning sessions, we cover momentum and the flywheel principle extensively. Negative momentum can happy quickly; rebuilding positive momentum takes around seven times longer. That timeframe is based on recovery from things like key staff departures, loss of key clients, cutting back on marketing campaigns and lead generation, backlog erosion, financial impact of multiple bad projects, expensive legal battles, etc. Momentum is an elusive thing: hard to identify, quick to disappear, and slow to regain.
Here’s an exercise that could help put a recovery model into practice: At least we can create a predictable recovery model using as close to a historic trend as you can find.
While the past isn’t always a good predictor of the future, you could look at the Great Recession’s impact on revenue to spot potential trends. Integrators with at least a 12-year revenue history might do the same.
Here’s an example from an NSCA member that completed this exercise:
When we examined their data, we found sobering trends:
- When revenue started to decline, it declined for five successive quarters before hitting a floor level
- The climb back up was slow, muted for approximately six quarters – with flat or small growth
- It took 18 quarters to reach 80% of pre-recession quarterly revenue
- It took 24 quarters (six years) to reach 100% of pre-recession quarterly revenue
This example reinforces the need to create a ratio of declining months and rebuilding months that lead to the restore/recovery period.
The Impact of Recurring Revenue
NSCA members that have a larger portion of total revenue comprised of recurring revenue will be better positioned to weather the current storm; however, we need to tend to our recurring business very carefully. Many people believe managed services agreements are an easy target for immediate expense reduction. Get out ahead of this as soon as possible to reinforce your value in providing these services. If you produce revenue exclusively from projects, you could see an ugly revenue decline as you eat through contract backlog. This will likely be followed by slow slog back to pre-recession revenues.
If possible, allow early or delayed schedules – but don’t let projects cancel. As we learned in the last recession, permanently cancelled projects cause massive revenue decline. Delayed projects cause a manageable setback. The rebuilding period to replace lost contracts is the basis of your scenario planning for recovery. –Chuck Wilson, NSCA Executive Director