Planning When You Don’t Need It Will Save You When You Do
By: Kirk Rathjen, Regional Vice President, Contract Underwriting, Merchants Bonding Company
Construction and surety have grown strongly over the past ten years with plenty of capacity, keeping the market soft, but it is always cyclical, so it’s just a matter of time before we start leaning toward a hard market. Some data analysts expect 2019 to be a cooling off period from the growth rates we experienced in 2018, slowly affecting construction activity. They predict “a deceleration” that takes us to a hardening market in 2020.
How can surety agents help contractors prepare for a hard market? Help them plan for it.
Step One: Outline the Plan
Outlining a plan will prepare them to be agile with decision-making and give them flexibility. A good plan should:
- Identify the most profitable type of work for the firm.
- Identify the most reliable and valuable customers.
- Identify their most valuable employees, who have the skills and expertise to serve their most profitable work and most valuable customers.
- Establish a budget with a forecast adjusted to the new lower sales volume.
Step Two: Build Cash Reserves
As a hard market approaches, backlogs will likely shrink and collections on aged receivables can slow. Building up cash reserves in anticipation of these two hallmarks of a hard market will lessen the sting for your clients and their employees.
Step Three: Control Overhead
Controlling overhead may be one of the most difficult jobs of business management, but those who diligently monitor overhead will be rewarded in a hard market. We recommend contractors keep interest-bearing debt at a minimum and don’t wait to sell off excess equipment. A good plan also includes right-sizing your work force. You will want to retain your most valuable employees to ride out a recession.
Step Four: Solidify Your Bank Relationship
Finally, solidifying your banking relationship when you don’t need it is much easier than waiting until you do. Even if a contractor chooses not to use the bank line of credit, it’s better to have it established and pay the nominal fees associated with it. Having agile credit facilities to help you navigate low income months is part of good planning.
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