The next two years will be the most difficult time for many decades in which to manage business. We can usually plan for expected or reasonably foreseeable events and circumstances. Known unknowns are inconvenient, but also something we can handle. But Donald Rumsfeld once said, it is the unknown unknowns – the ones we don’t know we don’t know – that is the category of issues that are the most difficult to handle. And we’ve had a few of them in recent times. So, how do businesses prepare?
First, we need to know what we are preparing for. There are currently 4 major “unknowns” impacting businesses:
- Geo-political uncertainties, such as the war in Ukraine and the continuing global influence of China
- The lagging effects of Covid, including ongoing supply chain issues likely to last at least another year (longer if the first point gets worse)
- Business collapses. We’re in the early stages of this, with our fifth largest builder (Pro-Build) going into administration, and other businesses already struggling with viability issues around rapidly escalating costs
- Widespread flooding along the East Coast of Australia.
Let’s dissect the impact of each one, then look at what we can do to prepare to weather the storm.
Geo-political uncertainties have always been present, it is the magnitude and scale of the current ones that cause the issues. Fuel prices have already increased some 25% in a few short months, and with supply controlled by basically an oligopoly situation market prices will likely increase further. At least we’re not in the treacherous position Europe finds itself in, reliant on Russia for oil and gas, whilst having shut down reliable base load power (coal and nuclear) and spent money on unreliable green energy instead. Whilst Ukraine has very little trade with Australia, we’ll still feel the flow on effects of increased shipping instability. There are actually advantages to Australian trade, particularly around mining and energy supply as demand for coal, uranium, gas and petroleum remains unchanged whilst the available western world supply capacity is reduced. Let’s hope we’re smart enough to seize the supply opportunity but also start using more of these inputs ourselves as an important factor in ensuring our own sustainable economy.
The lagging effects of Covid – the restrictions around Covid are hopefully now all in the rear view mirror. Having workforces off due to Covid restrictions, working from home and other additional business operational costs and functions (such as security checks etc) should start to disappear, removing a burden on businesses everywhere. However, for our industry in particular we will continue to see supply chain cost increases and delays for at least another 12 months. Machinery and the parts to keep them running are still in short supply for those players who don’t keep sufficient stock or have the financial capacity to fund forward purchases. Construction materials are in the same boat, with cost increases (25% seems to be a consistently referenced level) many times higher than official inflation putting a squeeze on any company with locked in contracts.
Business collapses – thanks in large part to Federal Government stimulus measures, the number of insolvencies has been artificially low for about 2 years now. There are signs that this is now starting to catch up, with the recent high profile administrator appointment to Australia’s 5th largest builder (Probuild) likely to cascade through the industry. With 700 employees and 2,300 affected subcontractors and suppliers, the first flow on effect has already occurred with Hitec Glazing in administration, creating an uncertain future for their 137 employees. One of Qld’s largest builders Condev has now succumbed to the same fate and gone into liquidation having stated that the labour shortage from Government measures around Covid, price hikes (25% cost increases in 18 months) and most recently flood damage was the final straw. The rising input costs and shortage of available skilled labour is further exacerbating the situation for many businesses.
Flooding issues have simply compounded many of the above points. Whilst flooding is devasting for many people, homes and businesses, it will have a less lingering effect. Or maybe it shouldn’t, as the correct response would be to re-evaluate the needs for more dams, building “flood proof” infrastructure, and giving greater consideration to why we have ever expanding concreting of flood plains during development approvals.
Whilst the above still contains unknowns, we can manage our businesses to cope with it and other upcoming challenges (such as rapidly increasing interest rates). Prudent measures include:
Plan ahead – do you need all your fleet? Will you need more or different equipment in the future? With long lead times and a supply shortage, get in early to order or start sourcing your machinery. Good used machinery is in high demand for a reason, and often has a better total operating cost than new machines (note the high take up of lower tier engine options because of their longer life and lower overall operating costs). Consider also the contracts you quote on and jobs you take on to ensure your contract allows you to pass on unexpected cost increases or that at least there is sufficient margin available when the time comes to doing the work. No point in doing a job if you will lose money.
Reduce risks – try not to be reliant on any single customer (or indeed supplier). Whilst there are benefits to having large customers, avoid having them represent more than 25% of your revenue. This reduces the impact of bad debts or delayed payments, and in many cases also improves your overall profitability.
Manage debt – if you don’t control your debt, your debt will control you. Interest rates are at historical lows. The long term average interest rate is 7-8%, which means that interest costs can quite easily double or even triple and still be below the long term average. What will the impact be on your business, and will you be able to refinance when the current term rolls over? Debt reduction is now a paramount consideration.
Manage payments – now is the best time to toughen up on slow payers. Likewise, if you prove to your suppliers that you are in a financially stable position and don’t drag out payments to them, they will no doubt put you first in line to supply – a factor more important than ever in this labour, asset and supply chain crunch time.
Concentrate on strengths and value add – review your whole operation. Do you need to do all the tasks you do, and if not, remove them or simplify them to remove costs and inefficiencies. Concentrate on the types of jobs you are particularly good at, and the ones where you have better and more sustainable margins.
Bigger is not always better – I know many companies that have seen growth in turnover as a measure of success, but it is what you keep (profit) that matters. Getting bigger also means more mouths to feed and a reliance on keeping a high turnover. Many times downsizing may be a more profitable strategy, and most likely less stressful too.
Fortunately, we’re a relatively mature industry providing a tangible product that is in need. However, it’s also a highly competitive industry. We’re in a Federal election year and need as much stability going forward as possible. Balancing all the above considerations is not an easy task, but every bit of preparedness will help.
As always, onwards and upwards!