test test

Risks of a Robust Economy

Risks of a Robust Economy

All the numbers say the U.S. economy is doing well. Unemployment, inflation and the GDP are on target and interest rates remain stable. It looks like a great time to expand a business to capitalize on the opportunity. But appearances are sometimes misleading, and a robust economy comes with risks that companies must understand to be successful.
While this might seem like the perfect time to grow a business, expanding too fast without a strong plan can end up detrimental to the business, its finances and its reputation. Owners need to pay attention to changes in demand, tariffs, tax adjustments and hyperlocal issues such as rezoning or growth in an area. Creating strategic plans to adjust the business model is a key element of risk management. For example, the robust economy means an increase in available jobs, allowing employees to be selective in their employment choices.

The “Risk Sentiment Index” survey of construction industry executives dropped to 4.91 on a 10 scale, indicating that companies are growing more comfortable with their risk exposure.

This year’s Index shows a real decrease in the risk sentiment index. That seems to indicate stronger confidence in the economy, but what hasn’t changed in five years is that construction companies are very concerned about having adequate staff for their projects.

Staffing remains the number one concern with nearly 79% of respondents listing it as their top issue. This means companies looking to hire need to be prepared to offer employee packages that stand out from the competition. Businesses need to have strategic plans for both good and bad economies.

The top four issues of concern were staffing (79%), economic issues (44%), healthcare costs (40%) and competition (28%). The issues construction industry executives felt least prepared to deal with right now included staffing, cybersecurity, and healthcare costs.

By the numbers:

  • 20% feel their company’s exposure for risk is lower than a year ago and 25% feel it’s higher;
  • 52% say their profit margins are better today than a year ago;
  • 42% say their pipeline of opportunities is better today than a year ago; and
  • 74% say they are able to build adequate contingencies into their project budgets.

There are three main areas where businesses falter even in the best of economies. Those risks are uncontrolled growth, geographic “creep” and diversification.

UNCONTROLLED GROWTH

Growth is not always good, especially if the growth happens too quickly or is not properly planned. Managing growth is essential as a business should not grow faster than it can build its capital base. Without a strong base, a company can go out of business because of too much work.

Here’s why. Growing too fast can lead to a decrease in productivity with fewer trained employees, a decrease in quality control with less direct supervision, and the financial risk of too much work and failing to meet contractual timetables.

GEOGRAPHIC “CREEP”

Expanding a business into a new area brings challenges. A change in geography means a new market with its own laws and regulations. There is also the challenge of hiring a new employee base, creating difficulty in protecting the market and changing local supervision. Logistics and overhead cost increases also come into account when deciding on a geographic expansion.

DIVERSIFICATION

Another risk is diversification. Expanding into a different type of work changes not only the initial focus of the business but could mean new production standards, new employees and a new focus. A construction company growing from building apartment buildings to building schools or government buildings is going to face a learning curve with new client rules and regulations.

BASIC STEPS OF RISK MANAGEMENT

Fortunately, careful risk management also brings new opportunities. Warren Buffet famously said, “Risk comes from not knowing what you are doing.” With any new business opportunity, it is important to follow the five basic steps of risk management.

  1. Identify the Risk. What is the new plan for the business?
  2. Analyze the Risk. Weigh the pros and cons of the opportunity.
  3. Evaluate the Risk. Rank the opportunity and prioritize its effect on the organization.
  4. Treat the Risk. Determine how the risk can be controlled or even eliminated.
  5. Monitor and Review the Risk. Keep a close watch on the risk to prevent it from seeping into the rest of the business.

Monitoring the way a company expands and proceeding cautiously through growth can result in long-term economic success. But as with anything, a successful expansion takes educated planning.

 

Originally published on Construction Executive