The more you read, the more you understand that the inflation rate for some products and services is slowing down, while other products and services are not, with some increasing, especially for contractors. The following covers inflation concerns and offers some insight into the numbers you need to keep a close eye on in your business.
Inflation Concerns
One thing you should be aware of is that even if the inflation rate falls to zero, you cannot expect the cost of these goods and services to revert to what they were in 2019. It's simply not going to happen. For example, for many commodities used in the construction environment, the one month change for June 2024 was primarily in the -1% range — with one exception being natural gas, which increased 36% in June 2024. However, the change since February 2020 is still in the 30% to 50% range. And these stats do not even cover services, utilities, fuel, insurance and interest rates. For contractors, it has been a rough ride, which will continue to impact their material and operating costs for the balance of this year and into 2025.
So, contractors should not expect to see input costs falling from where they are now, unless there is a recession that pushes vendors to sell at a discount to get inventory out the door. Even if this sounds like a good idea, it does not mean you can still bill out your materials based on your costs when the market says prices have decreased. In short, you may have to take a hit to move the product off your balance sheet.
One area that is hurting a lot of contractors is your insurance bill. The increases have been unbelievable even if you have a reasonable claim history. This is one expense category where you want to sit down with your agent and go through what you are paying for and what you can do to reduce the premiums. I happened to have a great agent that went through every policy to try and find errors in billing or ways we could restructure the coverage to reduce premiums. Companies pay for coverage and then do not abide by the terms of the policy to make a claim valid. In other words, you pay for coverage you will never get to use because your procedures did not meet policy requirements. A good example of this relates to cyber security coverage (which is not cheap) because the policy terms are not being followed.
Management Metrics
One way to accomplish more in your business is to find people who can get the job done to your satisfaction, as opposed to waiting to find the time to complete the project on our own. While staffing is still a challenge for many contractors today, you might consider engaging in coaching and/or consulting services that offer a lift to your business's problem areas. For example sites such as builder-resources.com provide find templates and suggestions for how to better manage your business. Here, visitors can test out financial worksheets before deciding to sign on for a service. One way to keep your business on the path and moving forward is to let someone else help you improve your reporting data.
It's important to work with metrics to help track operating results. Metrics that are easy to understand and easy to calculate. One such metric that many companies use is Sales Per Employee or Gross Profit Per Employee or Operating Income Per Employee. Here, "employee" includes full-time employees and part-time employees (for every two part-time employees, add one to the headcount). Any major changes in the metric result will push you to a reason for the change that you may be able to adjust before cost gets out of hand. I would also suggest you to try to find other metrics that may be industry specific.
As I have mentioned before, consolidation seems to be the name of the game for any owner looking to make an exit. In a recent article (eqtoday.co/esoprun), I worked with FMI Corp. Managing Director and employee stock ownership plan (ESOP) expert Nathan Perkins to put together a guide for those who might be considering the option. Even if your business is not ESOP material, it is a good review on how a company and its shareholders should prepare for a transition out of the business. ESOPs are great for contractors because they typically have limited buyers to work with.
While we're on the topic of metrics, it's important that you make managing your balance sheet and cash flow production a priority. I also wish to remind you to defer adding any debt to your balance sheet unless you are 100% sure that the investment produces a reasonable return on investment.
