The year is well into its fourth quarter and already, the past few months have many businesses reeling with the financial impacts of COVID-19, and no company has been immune to disruptions. If revenues are the measuring point for the impact of COVID-19, the construction industry has been spared the drastic financial impacts that other industries, such as the hospitality industry, have faced. Yet construction businesses have still had to face disruptions on jobs, safety risks, scheduling and the inability to hire essential employees. These changes have caused construction companies to take a second look at their internal processes. Dealing with the realities of the last 7 months has provided the data and the necessary time to offer construction companies the opportunity to adapt quickly. They are now able to prepare for not only the remainder of 2020, but for the changes that will be necessary in 2021. Construction business relies on the financial viability of other industries in order to perform its own services, so the impact of COVID-19 as it continues to move through the economy will further impact the construction industry itself.
As we look to 2021, financial leaders will be even more essential in ensuring that contractors are prepared to sustain or even capitalize on these changes to the industry. CFOs and Controllers can help prepare their businesses by taking a proactive approach and assessing the impacts of COVID-19 to date by asking some important questions:
- How has it affected our company?
- How has it affected our customers and their industry?
- How has it affected our vendors or suppliers? And lastly,
- How has it affected our workforce as a whole?
With this important information, the construction industry can then quickly transition to understanding how these main areas could be impacted in 2021. Each area of the industry won’t move in the exact same direction or even at the exact same time, so it is vital for your company to address each area with an independent and personalized approach. There will need to be careful predictions and planning for many alternative scenarios. Given the unpredictability of COVID-19, firmly planning out and projecting the unknown is next to impossible. Having multiple financial scenarios and a larger game plan will help ensure that thoughtful and proactive decisions are being made. The overall goal is to avoid the more dangerous reactive measures.
STEPS FOR PROACTIVE PREDICTIONS & PLANNING
As you look to develop a smart financial plan for your company in 2021, one thing is certain in the air of uncertainty, and that is cash. The old moniker, “Cash is King” is even more true during recessions and uncertain times. The push in the Winter of 2020, for most contractors, should be to prepare your company by monitoring and, if necessary, stock piling cash. This will allow your company to be put in a position of strength as it enters 2021; to not only weather unforeseen storms or swings in business, but to allow for the execution of plans that can capitalize on the market of other companies who may not be acting as proactively.
Construction companies should ask themselves if they are actively monitoring suppliers, vendors and clients, paying close attention to contracts and addressing the risk of increased pricing is necessary. The trend has been to focus more on cost plus types of arrangements, to protect against possible price increases in 2021. It is important to also review the financial capacity of your subcontractors and to ensure that they will have the financial wherewithal to complete the contract. Evaluating clients not only ensures collectability of receivables, but also monitors for potential delays or disruptions to the job. Reviewing contract schedules and staying on top of A/R is extremely important. Even with the increase in unemployment, government intervention and other opposing trends have continued to present challenges if your company is looking to add or replace employees. Consider a second look at current employees to be sure they are being effectively utilized to avoid unnecessary outside hiring. Before replacing A with B, take a look at the schedule to determine if delays or disruptions could be handled with the placement of employees where the work needs to be done. Having people on the sidelines is the primary objective that companies should look to avoid. Even with the best scheduling, those contractors that find themselves in growth will still need to get creative in attracting top talent and this again, will require cash and a position of strength going into 2021.
Without addressing the PPP loan program, it is still important to focus on all other debt. Refinancing debt, loan covenant waivers or restructuring and other debt modifications should be started now if they are anticipated to be an issue in 2021. The financial environment and access to capital can change quickly. Waiting to plan and address this issue until the first quarter of 2021 could cause disruptions to your company and will also give you less bargaining power. Part of managing cash is closely monitoring debt.
Especially important is planning out debt, cash and taxes at the end of 2020. If, over the last several years, year-end equipment purchases (whether through debt or cash) have been used to minimize taxes, you are sitting on a tax liability. It must be taken into account when deciding to keep debt to a minimum and to hold on to cash. There will be an offset to this, which will be a tax bill coming in 2021 as these deferrals from the prior years reverse. Depending on a company’s views of the current tax rates, 2020 could or could not be the right time to catch up on this deferred tax liability. In any case, proper planning at year end will be required.
As the construction industry puts together financial plans for 2021 and strategically tackles the uncertainty of the 4th quarter of 2020, try to embrace these challenges as opportunities. There are lessons learned and good processes that have come forth as a result of the challenges of COVID-19. Unfortunate as these challenges have been, they have allowed companies, employees and the industry as a whole to reevaluate their current finances and to make improvements for the future. With the right mindset and some planning, you can forge through this pandemic and come out stronger and more successful in the end.
By Josh Tyree, Partner at Harris CPAs
(This article was also featured in the Idaho AGC Building Idaho Magazine – Fall/Winter edition)
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