The consensus is the economic outlook still tilts toward positive, with indications the economic recovery that jump-started 2009 will continue at least through 2019. Still, it looks like all facets of the electrical industry could suffer collateral damage.
According to a recent article in tED magazine, for electrical distributors there are some areas of concern. Tariffs and countermeasures have caused widespread anxiety and pain. The first tariffs hit pushed up the cost of home construction. That cut into the sales prospects of not only homebuilders but also manufacturers supplying building materials. The implication for electrical distributors is they are likely to continue receiving more orders to support current projects, but it may jeopardize future projects by pushing them over budget.
It would be a head-in-the-sand mentality for electrical contractors not to brace for a bit of a tremor by the time 2020 rolls around. Electrical contractors are beginning to act very similar to the ways they did entering our last recession. Contractors are overpaying licensed individuals with very little experience and putting them in situations they just aren’t capable of handling. The concern here is the additional employees and higher wages are not being figured into projects they are bidding on now; they are just covering commitments made on projects bid many months ago. The result of these increased expenses on current projects may mean they are completed on time and avoid penalties but will result in a much lower profit or even a loss for the subcontractor.
According to forecasters at ITR Economics, when the economy appears to be slowing down, you should:
Know if your markets are heading for a soft or hard landing. A soft landing would mean building in the residential market will be slowing but not completely stopping due to a lack of demand and large current inventory. The hard landing would be more like builders not building a single home for 12 months or longer due to the issues noted above.
Beware of linear budgets. Many expenses rise as you’re busier, but they will not fall as quickly as you slow down. The biggest expense in any of our budgets is payroll. Don’t hold on to people too long when you don’t have the work for them because you are afraid you will not be able to replace them.
Stay on top of aging receivables. If your customer payments stall, chances are the slowdown domino effect is beginning on their end. Use all your means to collect money, including lien rights.
Revisit capital expenditure plans. Be realistic and consider what can be put off.
Eliminate unprofitable business segments. If part of your focus is municipalities and you see they are hunkering down, move on to those that have a more robust outlook. Also, look at your customer list to determine who to align with during a slowdown and who to
stay away from. Begin mutually beneficial alignments now.
Use competitive pricing to manage your backlog. This is not the time to try to make a few extra bucks on projects that are further down the road when you may need the work. At the same time, managing your backlog may mean higher pricing than you may be comfortable with on projects happening in the near term.
Avoid committing to long-term expenses. Lock in revenue. Make your money now by thinking short term. Focus on today’s projects and profitability. Take the long-term look when deals are more pliable and you have more time during a slowdown.
Go counter-cyclical. Know the cycles of your niche industries or contractor customers. For example, if your biggest customer focuses on facility maintenance when new construction slows, then start working with them now, even if it means … reallocating people and resources now to focus on maintenance.
Evaluate your vendors for financial strength. Review your customers to evaluate who pays you quickest and who is set up with the best structure to endure a slowdown. Align with the strongest folks and discuss now how you can work together in a mutually successful way during a slowdown.
Cross-train people to prepare for workforce reduction. Layoffs will eventually have to happen. Make sure you train your staff to not only do their job but the job of the person beside them that might not be there anymore.
Be optimistic. Riches can be made in recessions, if you understand how to navigate the peaks and valleys of the economy.
William F. Donahue is president of Crown Supply Co., a distributor of electrical, security and fire alarm products, with locations in Providence and Massachusetts.