EP55: Are You Ready For The Downturn?

it's never going to happen. The prices are not going to come down because it's been under. underappreciated for so long, and this is the new norm, and blah, blah, blah, blah, blah. And I just don't believe it. I don't believe it because it can't sustain. There's no way we can sustain an economy with overinflated housing prices, overinflated material prices, and under-demand materials. overinflated labor prices now. It can't happen. Inflation is at an all-time high. All of these things factor into what happens in the economy. Now, this isn't a 1938 Orson Welles World of the Wars broadcast remix. I'm not trying to scare people into thinking that the end is coming. That's not the purpose of this podcast, and I hope you understand that. The purpose of this podcast is to make you aware and to see if you're ready for an economic downturn, a slowdown in the construction industry. So I have one simple question for you that you have to ask yourself and answer. Is your business ready for a downturn? So on this podcast, I want to identify some things that are going to help you recognize if you are ready. or if you're not ready. So I hope you got your seatbelt on. If you're listening to this in the car, you should be if you're driving down the road, but you need to buckle up because this might sting a little bit. I was debating on really what I wanted to talk about today. And this topic of the economic downturn has really been weighing on me heavy for the last couple months. And I was like, I don't want to like preemptively put this out there and scare a bunch of people or Should I even talk about it? But I think it's important. And so I'm going to go ahead and do this for you guys because I think it's better to have said it than not and see a lot of contractors and contracting businesses struggle through this. So if you haven't heard my story before, I started my business in 2009. During the last housing market crash, I saw everyone exiting the business. And so I thought, what a great time to start a business. I honestly don't even know how I survived during that time because it was very difficult. But probably through persistence and stupidity and hardheadedness was I able to survive. That coupled with my wife and I made some smart financial decisions early on when we got married. And we bought a house that we could afford strictly on her income. So really the business barely had to generate any income to survive. It didn't make it easy, but it wasn't going to be in a negative situation, negative some situation where if I didn't bring enough money home, I wasn't going to be able to pay the mortgage. So call it dumb luck, call it being smart, whatever, but we were able to survive through that. But it was not easy. It was not easy at all. And that's where we're headed right now. There's a famous quote. Some of you may have heard it by G. Michael Hoff. It's hard times create strong men. Strong men create good times. Good times create weak men. And weak men create hard times. Well, we have been in a good times scenario for the last several years, probably the last five years for sure. The last two years have been gangbuster. And a lot of weak men have been created during that time. And now we're getting ready to go into a hard time scenario. This is obviously based on years and years and years of history of how the cycle of things happen. And if you don't know, everything pertaining to real estate is on a cycle. Some people call it the 20-year cycle where the prices go up and then go back down every 20 years. But the problem with the last 20 years is that with technology, it has shortened that timeframe because we're not actually at a 20-year span yet. So we're looking at an accelerated timeline of what's happening with the real estate market. Now, a lot of people are saying, how is that even possible because there's so much demand for real estate like houses? How can that even be true? Because people are just paying out the wazoo for houses and stuff. Well, it's going to start with the commercial real estate first. And the commercial real estate will bring it down through the residential. But I don't want to get into all that right now. So let's talk about what you can do in your business. And are you ready for the downturn? So here's some things to know if you're ready. If you're ready. If your business is ready, you will have these following things in place or some version of these in place. Number one, you should have three, at minimum, three months of expenses covered in the bank. So in other words, you should have enough cash in the bank or liquid cash. It could be in investments, but liquid money available for you to cover at least three months of your expenses. Now, if you're a sole proprietor for your family, that means you have to have three months of expenses for your business and for your personal income. So it's not just your personal income. If you want your business to survive, you should have three months of your business expenses and your personal expenses covered. The ideal amount is six months. If you have a super strong, healthy business, it's six months of expenses. covered in your business. I know that right there knocked out probably 95% of you, but for the 5% that are still on, I'll keep going. You need to have one to two months of payroll covered. Money set aside for payroll. One to two months of payroll. If you have $10,000 a month in payroll, you need to have $10,000 to $20,000 of money sitting in the bank. just to cover payroll. So for most of you, we may be $20,000, $30,000, $40,000, $50,000 or more of money that you need to have between three to six months of expenses and one to two months of payroll. Most of you are probably knocked out by now. That's what you need to be at for a healthy business to survive. Another thing you need to be is you need to be booked up for several months. I've seen guys right now talking about they don't have any work. They can't find work right now. And that's just crazy to me that they are not able to find work because there is so much work out there. So you need to be booked up right now. If you're not booked up right now, you may already be in trouble. You need to know your numbers pertaining to how many leads you need to sustain your current production rate. So I know a lot of contractors have no idea how many leads they get. They have no idea what their closing rate or sales closing rate is. They don't know any of that stuff. They don't even think to check it. And even if they do think to check it, they don't have anything in place to actually track it. And so they have no idea. A lot of you just have the phones ringing off the hook and you don't even know where it's coming from. You're not even asking them how they found out about you. So you need to have your marketing figured out. You need to know where all of your leads come from, what marketing avenues work. How are you getting your leads? You need to know these things because if your leads are all coming from referrals, in a down market, the referrals will stop coming. So you have to be able to supplement those with other means. So if you have your marketing figured out, that means that you know where all of your marketing comes from and you know how to replicate that. If you do paid advertising and you need more leads, you can just pour more fuel on those leads, on that source, and generate more leads. So if you're doing, for example, Google Pay-Per-Click, and you're spending $200 a month and that generates 50 leads, when the economy downturns, the leads will drop off. So that means that you'll have to dump $400 a month into potentially getting 25 leads. But you'll know that it works because it's been working for this time and you've been tracking it. The difference is you're going to have to dump more money into your advertising to get fewer leads. But you know that that source works. That's why it's important to know how many leads you need and how much it costs you and all this stuff. You got to be tracking this stuff, guys. You have to track all of your lead stuff. All of your sales, marketing, and lead stuff needs to be tracked on the daily. Are you looking for alternative income streams or do you have alternative income streams available? And what do I mean by that? Well, that can be different lines of services you offer, but it could also mean you have a business model or a business that's flexible enough that you can shift things. For me, as an example, We do handyman and remodeling. Remodeling is our bigger stuff. The handyman is the small stuff. It keeps us busy all year round. In a situation where prices are way out of line and the economy starts to dip, I can very easily switch to all handyman stuff where it's like 90% labor,10% materials. And I can sustain with that. The worst case scenario, I can fire everybody and I could go back to be a one-man show and I can work and make enough money to sustain myself and my family during a year or

But if you're in a situation where you have lots of overhead, lots of operating expenses, lots of employees, lots of equipment, and all of a sudden your profits dip by 50%, you're screwed because you have all of this stuff and there's no way you can... you can change or flex. So like if you're trying to think of where you would have lots of equipment, maybe you're in the concrete and you have lots of equipment for that, you may have to change. You may have to be able to flex into something else, right? If concrete prices go up through the roof, what are you going to do? What else can you do in your business to sustain? You have to think about these things, guys. This is real stuff you have to think about. You can't just put it off and say, oh, that'll never happen. That'll never happen. It will happen, and you're going to get caught with your pants down. So you have to be ready for this stuff. So if you don't have these things that I just talked about, you're already probably screwed. But if you have these things, if this applies to you, these next things apply to you, then you are going to be screwed. I mean, you are basically screwed. then that is that you're over leveraged on assets. And that's what I was talking about. You know, if you're basically breaking even each month to pay your bills, you're going to be screwed. I mean, that's just, it's that simple. You're going to be screwed. You have no savings whatsoever. You're screwed. You don't even know where your leads are coming from. Like you have no idea. This phone just rings and you just get jobs. You're screwed. If you rely 100% on referrals or you're a subcontractor and you have GCs

you have no means of marketing put in place to be able to generate your own leads, you're screwed. And if your schedule isn't booked up several weeks to several months, depending on your timeframe and what you do, you're going to be screwed. And for some of you, that's a hard pill to swallow. And I'm sorry to have

But a lot of contractors right now are on very thin lines. And they think that they're killing it in business because they started in the past two years. And they don't realize that the last two years have been like gravy. Like you could just show up and start a business today and tomorrow the phone's ringing. And that is not realistic. So whenever the downturn comes... You guys are going to be crapping your pants while the rest of us who have been through this before are going to know, yeah, it's going to get tight. Yeah, it's going to be a little rough. We're going to have to unload some expenses, but we know we're going to get through it because we have the marketing in place. We've been tracking our numbers. We know what we need to do to run a healthy business. That's going to be the reality of it. I saw just today on a Facebook post in a contractor community. There was a guy that basically said, I've been an apprentice for six months and I want to go out on my own and start my own construction business. What things do I need to know? Now let that set in for a second. He's been doing construction for six months and now he wants to start his own business. That's the reality of what's happening in construction right now. People that think that they can do stuff with six months of experience. Now, I'm not saying that it's not possible, depending on what the trade is and how smart they are and all that stuff. But that's just not a very realistic expectation from someone. But that's what's happening right now in construction. I know people that literally coming over from corporate America who's starting construction companies because all they see is dollar signs and they really have no idea what they're doing. So that's what's going to happen right now. And it is happening. The market's being flooded with all the quick buck type people and they're going to saturate the market. Prices are going to go way down on the labor and all that stuff. You guys are going to be competing. It's going to be tough. It's going to be real tough. There's something you have to understand about business. There's two seasons to business. There's an investment season and there's a profit season. And we've been in a profit season for the last two years. When you have a profit season, You need to be collecting money because eventually you're going to have an investment season. Now, this is the same if you just wanting to scale a business. You can't scale a business without having profits. You have to go out and sell something. You make a little bit of money. You take a small percentage of that money and you reinvest it back in the business. You make a little bit more money and so on and so on. You go back and forth, back and forth, rinse and repeat. And then eventually over a period of time, you've grown your business. going through profit and investments seasons, right? But the last two years collectively have been a profit season for a lot of companies that were already established and even new companies that came in. But a lot of these guys are coming in, starting a business, they're making profits. They go out and they buy an $80,000 pickup truck. They buy a new house, new cars. They spend all their money. They think they're contractor rich. They're spending everything that they have and they have no money to reinvest back into the business. And part of that investment is your savings to cover for expenses. So right now we're in a profit season and we're getting ready to come back into an investment season. And if you're not ready for that, again, your pants are down around your ankles. So this is not going to be a long podcast because I don't want to keep dwelling on this. I just wanted to point out to you guys that you need to be ready. And here's the thing. If you do all these things that I said, three to six months expenses, one to two months payroll, booked up for several months, you know all your marketing. If you do those things and nothing changes, are you better off or are you worse off than you would be if you don't have any of those things in place and the market does tank? There's no downside to saving money. There's zero downside to saving money. You guys need to be stockpiling cash right now. You need to be putting back as much cash as you possibly can for the rainy day that's coming. And if the rain doesn't come, then guess what? You got a lot of money and you can just write yourself a big bonus check and go buy that Harley Davidson or whatever you want. There's no downside to saving money. Keep that in mind, guys. There's two takeaways I want you to have from this podcast. One, start stacking cash. And two, start looking for labor-only revenue streams in your business. There's a book I want to recommend. It's called Foresight. And I don't have the author in front of me, unfortunately. I'll put it in the show notes. But it's an excellent book. It's called Foresight. And it's basically about the top people in the world that were able to see trends in businesses and get in front of them and they cashed out big time. So even in the down market, there are trends and things that you can do to still cash out. And now is your time to start looking for those opportunities. Short on materials, find labor-only revenue streams. So you don't have to wait on materials. I had a call today with a person that's a fence builder and the materials are hard to get. So he started doing repairs.

He's doing repairs and staining. That's a great idea to be able to augment waiting on materials, right? Because people are still going to need labor done. It's going to be the material. So find labor-only revenue streams and be prepared for that. So that's all I got for today. You know where to find us on all the regular social media platforms, Hammer and Grind Podcast. Check out the Profit Club, hammerandgrind. com forward slash the Profit Club. If you want help navigating these potentially scary times ahead, we can help you with that. There's lots of things you can do to be ahead of this curve. That's it, guys. Until next time. Be the best you.