Plan Ahead for Any Declines

How you approach 2008 depends on what you do, where you do it and how good you are at it. Once you figure out where you stand in these areas, it's time to start planning for the coming year. No matter what, you should definitely have your 2008 business plan completed within the next three to four weeks.

Numerous speakers at the recent AED Executive Forum stated there was nothing on the horizon to indicate a material reduction in construction activity. They did, however, emphasize that overall local conditions could be different, and the type of work could generate different outcomes. These differences were well documented based on discussions with construction equipment dealers. Many were considerably down in equipment sales, and some were at similar levels as 2006. Some were even experiencing business increases.

Both analysts and market forecasters indicated the financial results for 2006 and 2007 were affected by market anomalies related to a bloated housing market, which resulted from aggressive financing programs. Once these unique circumstances correct themselves, it should be back to business as usual.

Analyze budgets
The question becomes: What is "business as usual" for you? If 2006 was an anomaly, with 2007 the start of an adjustment period, where do you go from here?

No matter what condition you find yourself in currently, you have to start thinking about 2008. One speaker at the Executive Forum suggested ignoring the anomaly and planning 2008 using 2004 and 2005 sales levels. For those of you still going strong, you have to assess whether this level of activity can be maintained for the next 18 months. If so, prepare the 2008 operating budget assuming any sales correction will be minimal.

The rest of you can start with either 2004 or 2005 levels, or maybe the average of both years. AED's Cost of Doing Business survey indicates that 2004 sales were 26% less and 2005 sales were 12% less than in 2006. Contractors should be experiencing similar results, with a probability of a rebound to the '04-05 levels in 2008.

If we assume you plan to budget for a 25% decrease in 2008, you have a lot of work in front of you to re-align your financial position. In addition, you need to consider changes in the credit markets, interest rates, receivables management, inventory levels and general balance sheet management to preserve proper cash flow.

Steps to take to ensure a proper analysis include the following:

1. Prepare your sales mix projections, and work backwards to determine what payroll levels you can support at these lower sales.
2. Project your remaining payroll requirements and compare both sales and your gross profit calculations to your industry benchmarks.
3. Compare remaining expenses to the 2004-05 levels.
4. Do the same for the balance sheet to ensure the income statements and balance sheet are in sync.
5. Also prepare cash flow statements to see if further adjustments need to be made, or banking arrangements adjusted, to meet your requirements.

You can't just go back and use your 2004-05 budgets or income statements without further adjustment, because nearly every line item has changed since then. Thinking it through, in 2008, you may need to perform at the 2005 sales level with fewer people, since costs have certainly increased. Do not ignore any line item; review them all.

Find a model
Just a reminder that virtually every segment of the construction industry has benchmarks for 2006 and prior years. These will help provide the financial stats needed to convert to manpower and equipment needs.

Your systems may have a model to draft projections and cash flow statements. If you don't have these, there are standalone systems available to provide this output. Need help? Get it from your accountant, an independent contractor or someone who works out of their home - the help is out there for a reasonable price.

No matter what condition you currently find yourself in, planning for 2008 is a must considering the unique financial and market conditions we find ourselves in.