By Ron Coleman
Interest rates have skyrocketed in recent months. Not only that, but the forecast for 2023 showcases further increases. The good news is that Canada created 108,300 full-time jobs in October 2022.
The bad news is that 42 per cent of small businesses didn’t pay all of their rent in October, and September was almost as bad, according to an Alignable Research Center poll published in October.
A recent study by Statistics Canada shows that the country has a very low unemployment rate and that labour costs are increasing dramatically. These costs get passed on to the consumers and push inflation higher. The government counters this by pushing up interest rates, which in turn causes increases in wages, and so on.
The balance the government is aiming to achieve is to tame inflation without causing a recession. That is an extremely difficult task. We need to ensure that, while we hope for the best, we must plan for the worst.
The beginning of 2020 was very rosy. Nobody had any idea what the next two years were going to bring. Without financial aid from the government, I am sure many would not still be in business. It is highly unlikely that the government is going to bail us out in 2023. We are on our own and must plan accordingly. Running your HVAC or plumbing business is akin to the feds aiming to balance inflation and recession. Difficult but not impossible.
Find the stability
Let’s explore interest rates first. Normally I advocate businesses and homeowners to go with variable interest rates. But, now that we need a better sense of stability, I would recommend that you lock in as much of your debt as possible for at least three years.
If you are going to borrow money, make sure that it will generate a positive cash flow. Buying new equipment and vehicles is an ongoing investment we make in our businesses. The cost of vehicles is at an all-time high, and operating costs are also rising rapidly. Explore not only the capital cost of a vehicle but the operating costs. We all know that electric vehicles are the way to go. So, buying a gas-powered vehicle now, which you will expect to use for at least five years, might not be the best decision. The availability of electric vehicles will be a lot better in two years. Maybe buy a used vehicle and keep it for two to three years. This also reduces your investment and interest charges and will reduce your operating costs when you get the electric vehicle. Only buy what you really need.
If your need is short-term, then do a short-term rental or lease. Do an internet search or check with your association as there are companies that specialize in short-term rentals and leases. Can you rent the equipment you need? Can you defer the investment?
Apart from fixed (capital) assets, we also use lines of credit for financing our operations. That’s called working capital. There are several reasons we need working capital in our business. First, look at your current assets. The largest categories are likely accounts receivable and inventory.
Reduce your accounts receivable by being more persistent in your collections and by getting deposits. If you are doing new construction, monitor your holdbacks. Make sure you invoice all work at the earliest date possible.
There are two sides to inventory, which we covered this in a previous article. The balance is between carrying enough to service your customers in a timely manner and maintaining the lowest level to lower borrowing costs.
We need to have a contingency plan in case of a recession. We had enough surprises with COVID-19, we can’t afford anymore.
If you look at your salaries (that excludes wages in direct labour), you will see that salaries represent approximately 50 per cent of your overhead. You will also realize that most of your overhead is fixed or very close to fixed. You can make some savings on cost elements such as advertising as long as it doesn’t reduce your income. You do need to look at the cost/benefit of overhead decisions.
The real focus needs to be on your overhead labour. As the owner, maybe you can reduce your salary temporarily. It’s your company, so you’re not really losing anything. You are protecting your investment. Have a strategy for having estimators, project managers and other staff with trade backgrounds being pushed down to direct cost as superintendents. You will retain your good people, reduce your overhead, and likely increase production as these are often people that are very efficient on the job front. Superintendents become foremen, foremen become journeymen and lay off the least productive journeymen.
I know we hate to lay off our top people, but if our numbers are not there, we can’t afford the false economy of hoping things will turn around. Hope is not a strategy.
Cost cutting methods
We also need to look at cost-cutting measures in the field and the shop. Start by looking at areas that can be automated. I hope none of you are still using traditional timesheets. Technology has moved so far in recent years that many steps in our businesses are being automated. Your competitors are doing this, and you are getting left behind if you are not investing in technology.
There are numerous government incentive programs to streamline your technology. We have covered those in a previous article, as well as explored areas around efficiency.
Revisit your estimated costs and your charge-out rates. I recently did a workshop on labour rates and none of the contractors were including a warranty as a cost of labour. MCA Canada recommends that labour costs should be increased by three per cent to cover potential warranty issues.
There is no downside in preparing for a recession. There are several upsides. The first one is it will force you to be more profitable. That will reduce your need for borrowing and build up your cash reserves to protect you in case of a recession. This will increase the value of your business.
You will also feel more secure and less stressed out and know how to protect your key employees. By streamlining your investment in equipment and vehicles, you will reduce costs.
I am sure all you service contractors constantly tell your customers the importance of preventative maintenance. No heat and burst pipes are never fun. They cost more to fix and are very disruptive. Follow the advice you give to your customers and start your preventative maintenance plan now.