Are we heading toward a recession? In one? It feels like this question is on many remodelers' and custom home builders' minds lately, and opinions vary depending on whom you ask. At the end of the day, no one really knows, but it never hurts to be prepared. That's why we want to share some ways you can start recession-proofing your remodeling and custom home-building business today. Let's get started!
1. Have Cash Reserves
Whether it's 3 or 24 months in reserves, your business should have funds for emergencies (like a possible recession). Choosing a reserve amount is a crucial financial choice that depends on your company's specific needs. You can determine how much money you need each month by calculating your burn rate. If you had ZERO revenue, how much money would still go out the door every month? Then, decide what makes you comfortable in terms of the number of months you could survive with no work. Many companies land in the 3 to the 9-month range, but it really comes down to what makes you sleep well at night.
2. Set Aside Living Expenses
On the flip side, it's beneficial to have cash reserves for your personal expenses as well. In the case that you might have to cut your salary to zero, having at least 6 to 12 months of financial reserve will help counteract those adjustments and help keep you above water. Deciding how much you need personally will be similar to what you did for your business. Figure out your monthly burn rate, personally, and multiply it by the number of months you want to have in reserves.
3. Don't Quit on Marketing & Sales
In the past, it wasn't uncommon for remodelers and custom home builders to cut marketing expenses first when possible recessions hit. We highly recommend against this old practice because cash flow is how you survive. If there's no marketing bringing in new leads, then there's no money to keep growing. The companies that most often succeed in past recessions are marketing year-round, through the good and bad times. Our experienced team of marketers is on standby and can help create a recession-proof marketing strategy for your remodeling company.
4. Develop a Budget-Down Plan
Let's say you're a $4 million per year remodeling or custom home-building business. What would it look like if you went down to $2 million in revenue the next year? How would you scale down to successfully survive this change? That is what we mean by developing a 'budget-down' plan. It's an approach that'll help you decide which overhead expenses to cut, the timeline, and the types of decisions you would need to make. It's not a fun plan to create, but it will help the company survive in the worst of times.
5. Set Up Lines of Credit
This last tip is advice from Spencer's uncles: open up home equity lines of credit (HELOCs) and draw those loans so you can have that cash accessible. A strategy you can steal from them is opening a HELOC and taking that money to a different bank, which prevents them from immediately closing the line or taking the funds back if a recession were to hit. This tactic relies on timing and might not seem favorable, but if you become concerned, this could be a great strategy to add to your cash reserves.
6. Collect Money UPFRONT
Nothing is more concerning to a small business than cash flow, especially in a recession, but getting clients to pay can be difficult. Why? Clients are also worried about cash flow too! Many people cannot afford to pay hundreds or thousands of dollars out of pocket. So how can you reconcile your needs with those of your client? Consider financing options for your customers where they can make payments over time or deposit options, but you don't sacrifice your cash flow.
If you take the time to set up these strategies for your remodeling and custom home-building business, you should survive any recession. You'll have cash, a strong marketing and sales engine, a budget-down plan, and extra lines of credit available. As we think about the next several months, these are some best practices to help you prepare for anything that comes your way.