How will coronavirus infect your business?
By Steve Ryan
Like any rational person you are probably concerned for the impact the current pandemic will have on your construction business. No one can tell you the answer to that yet, but you can prepare.
Step 1: Accept the likelihood that this is going to cost you. Trying to prevent any loss at all can cause you to hang on so tight that nothing works. Now, if you have faced the fact that we are losing altitude, how do you make the descent as shallow as possible?
Step 2: Look at the horizon. While the news of today obviously matters, your focus needs to be three to six months out. That is not to say this will all be over in that time, nor is it meant to say that we will be in full blown crisis for that long. But that’s the gap that looms before us and even if we haven’t levelled out by that time, we should have a better understanding of economic conditions by then.
Step 3: Assess your business risk. The Covid 19 crisis is uncharted territory and the consequences aren’t really known yet. But different categories of risk will hit at different times. You need to put things in perspective and make sure you deal with the most urgent issues first.
The things that are probably hitting you right now are:
- Revenue stops while costs continue to accrue (you can’t complete and invoice work or perhaps people just aren’t paying); and
- Timelines for active projects get pushed out. You may have clients who want to suspend work. You may have suppliers or subs who have cut back on activities. You may make your own decision to close down jobs for the time being. Whatever the reason, there will likely be sources of revenue you had built into your plans that will not arrive in your bank account as planned.
Look at each project individually and determine for each one whether it will:
- Proceed as planned;
- Proceed but incur delay. Gauge what the delay will be;
- Stop. Sometimes work was started, but the client can’t/won’t make further payments; or
- Get cancelled. The job was in you plans but it will not happen now.
The short form in all of this is you will be squeezed for cash. Less money (or perhaps no money) is coming in but you still have bills to pay. Even if you suspend operations you still have overheads like rent and vehicle leases. There are lots of other stresses on your business that you can’t ignore, but the most immediate need today is to have cash available to maintain operations.
Step 4: Arrange short-term financing: Unfortunately, your need for cash could be running up against your next immediate risk. It will be harder to borrow money. In the current crisis everyone will look like a higher risk to lenders than we did a month ago. The best thing you can do to improve access to funds is to help a lender measure their risk. For short-term line of credit or bridge financing, three primary questions are essential for a lender to gauge that risk:
- When will you start needing cash;
- What is the maximum amount you will need; and
- When will you reach that point and begin to repay.
In case you think you can provide these answers based on your instinct or hunch, be aware that lenders will be considering two more questions for themselves:
- Do you know what you’re talking about; and
- Do you have a handle on things and can you navigate through the crisis.
If you will need to arrange short-term financing you may not succeed without a structured, detailed cash flow projection for your business. You may have an accountant willing to help you but understand that this is not a job you can delegate to someone else. It depends on your detailed knowledge of ongoing projects, schedules and customer commitments.
You have a lot of urgent demands on your time these days so if this looks like one you can defer until it becomes critical, understand one more thing: Nothing tells a lender that you don’t have a handle on your business like requesting a loan a few days before you will run out of cash. To present yourself as a safe bet, you must show them that you have looked ahead. Anticipate now what your cash requirements will be in the weeks to come. Approach lenders now so you can demonstrate that you will be in control when the time comes and you need that loan.
For an easy to follow tutorial on how a general contractor can prepare a cash flow projection see the video below.
MMI Professional Services is committed to the success of contractors by helping them develop the business and management skills they need. For information on ways to run a better building business contact the writer at email@example.com