Everywhere we turn these days, it seems the headlines are all screaming “Recession Ahead”. In various areas of the country fabricators are already seeing the impact of rising mortgage rates and a general softening of the economy. Quote volume is down and pressure to reduce prices is up. Those trends will likely increase over the next 2 years.
As a result of an earlier article, I’ve had requests to go a bit deeper into the details of how to prepare for a recession. In this article, we will focus on the ‘batten down the hatches’ approach where a fabricator decides to minimize their losses and spend as little as possible – hoping to come through the other side with minimal damage.
In this ‘hunker down’ approach the assumption is that there is little the fabricator can do to impact sales volume or to fight the pressure to lower prices. This drives a strategy to control all costs, prepare to lay off employees as needed, and be prepared to dip into reserve funds to keep the business functioning.
Control costs: Get a copy of your latest Profit and Loss statement and your financial transaction register and start going down the list. Review each transaction and ask, “If I eliminate this cost, can the business continue to function effectively?” If the answer is ‘Yes’, then eliminate the cost. If the answer is ‘No’ or ‘I’m not sure’, then find a way to reduce the cost. Can you switch to a lower price plan? Can you give up some of the features of the service for a lower price? Can you find a lower cost alternative? Do you need as many company cell phones as you have? Do you need as extensive a plan on all those phones? Can you increase the deductible on your insurance plans? Do you need all of the organizational memberships you currently have? All options should be on the table. If you can’t find a way to reduce that cost, consider eliminating that item temporarily as a test. You may find out you can actually do without it.
Prepare to lay off employees: Even though good employees are still hard to find, if sales volume gets low enough, you will be faced with having to reduce labor costs. In this scenario, it is critical to understand the skills of each employee (demonstrated and validated skills). For small shops, this is less of an issue because their employees need to be able to use multiple skills on a daily basis. For larger shops, having a current Skills Matrix can be useful (download a copy from the Free Tools tab at www.FabricatorsCoach.com/free-helpful-tools). Even in a smaller shop, documenting the skills of employees can help ensure you are keeping the right employees on the payroll so the business can function.
It is important to plan these reductions now before you are in the heat of the moment and possibly have to make a quick decision due to a sudden drop in sales. At what sales level do you need to have your first layoff? Which position will go first? Who will that person be? How much severance will you offer? Make a list with these details so you don’t have to remember all this later. How will you handle the conversation with the employee and how will you announce it to the rest of the company? Outline the talking points now and get them on paper. Do you have any company property that needs to be recovered – tools, phone, computer? Make a company property list for each employee.
As you decide the order in which to eliminate positions, it’s helpful to consider the level of difficulty in filling those positions as the economy begins to improve. Can you hire CNC operators more easily than fabricators or finish polishers? Are installers easier to find or are templaters easier to find? This could impact your decisions.
Dip into reserve funds: This is probably the trickiest of all. Before you must dip into these funds, you should already have a written plan. How much cash do you have? How much is your line of credit at the bank and what are the covenants associated with it? How fast are you burning cash every day? How does that cash burn rate change as you execute the items above? How long do you think the downturn will last? Without putting all this data on paper, you are running your business on guesswork.
Take the time to set up a spreadsheet that shows these numbers, shows the financial effect of the changes you have planned above, and resolve to stick to this plan. If you don’t plan this out, if you don’t write it down, you run the very real risk of running out of cash before the economy picks back up. That could be the end of your business.
Tracking this financial data on a daily basis will not only keep you from being surprised by a change in business levels, but it will also help you manage the business better now. Improved management now generates more profit to increase your cash reserves for use later. It also helps you manage your cash more effectively during a downturn.
Tracking leading indicators will keep you from being surprised. Leading indicators tell you what business changes may be coming your way – before they get there. An obvious example is your quote level is a leading indicator for order level. Since all quotes don’t convert to orders, you should be tracking your quote-to-order conversion rate. Calculate it, track it every day, and graph the trend. Watch that trend to give you an early warning for business declines and also feedback on your pricing. If your conversion rate is going down but quote volume hasn’t changed, then your prices may need to be adjusted. If both quote volume and conversion rate are declining, you have a major negative business change coming your way – dust off the plans above and get ready to execute.
If you don’t already have one and can possibly afford the time and money right now, investing in a CRM prior to a downturn can be a lifesaver. A CRM can tap into activity from social media engagement and web site traffic – leading indicators for quote requests. A CRM can help you track conversion rates. A CRM can help you manage your current sales process. Ensuring that salespeople are following up on quotes in a timely manner (according to your guidelines) is essential to keeping your conversion rate high and getting sales.
If you are already challenged by a softening economy, the above items can help your business survive. If you want to consider a more aggressive approach to dealing with this economy and want to figure out how to take advantage of some of the opportunities it will generate, look for next month’s article.
This changing economy will generate significant headwinds for many fabricators. If you need assistance planning for these challenges, reach out to a seasoned business owner and coach for this industry – Ed@FabricatorsCoach.com. You deserve to have a business that not only makes you money but also allows you time to enjoy it.
This article was published in the March 2023 Issue of the Slippery Rock Gazette, find it at: