How is the economy treating you this year? Are you having fun yet? Probably, if you had a nice construction backlog coming into 2024, or work in a warm climate where more people are migrating to, or if you are lucky enough to get a piece of the government programs building, or refurbing manufacturing or chip sites. But no matter where you stand, there are plenty of issues you need to keep an eye on to protect profits and cash flow.
We might as well start out by dealing with the elephant in the room, known as INFLATION and/or SHRINKFLATION. Either the price goes up for the same volume you are used to buying, OR, the price stays the same, but you receive a smaller amount of product. Now, I know you fall under the former, but not so sure you incur the latter. Could it be you purchased a box of nails that looked to be a little smaller or was a little lighter than you are used to? Hey, why should you be immune to what those bad manufacturers and distributors are doing to the folks buying groceries?
We hear that inflation is under control. Then we hear about a 3.5% increase year-over-year in a recent government report. And that 3.5% is on top of the pandemic inflation that seems likely to stay around. You also hear bankruptcies are up 30% this year compared to last year, and those bankruptcies are a result of not being able to manage cash flow related to the higher prices and higher interest rates now tied to business bank loans. I hope you are not incurring any similar problems, and if you are or think you will be, I encourage you to take steps to reduce costs and improve productivity.
I know. That is easy to say, but a lot tougher to do.
I am staring at a chart titled, “WHERE INFLATION IS AND ISN’T.” It covers a 12-month period, from March 2023 to March 2024. It includes 29 cost categories and reflects both increases and decreases in prices during the March-to-March time period. Insurance, rent, housing, restaurants, payroll, and transportation are 4% or higher, with insurance increasing 22%. And I know if you are in the construction business that your insurance rates have increased dramatically. If they have not, there is something wrong.
The chart includes 29 cost categories and reflects both increases and decreases in prices during the March-to-March time period.U.S. Bureau of Labor Statistics
Moving on, energy, alcohol, medical treatment and recreation have increases in the 2.5% range. Gasoline and groceries are in the 1.2% range. (I do not believe the grocery percentage is accurate). If I told my wife that grocery prices only increased 1% during the past 12 months, she would pull out a Walmart receipt from March 23 and tell me to duplicate the purchases and we would eat what I bring home. I think we might starve.
Believe it or not, there are 10 items where the prices decreased. New vehicles -.01%; electronics -.08%; hotel rooms -1.9%; used vehicles -2.2%; school supplies – 3%, furniture -3.8%; appliances -6.3%; airfare -7.1%; toys -8.2% and rental cars -8.8%. I guess some of these categories are related to the housing market, and the auto markets, but not much else tied directly to construction.
Add all these expense categories up, and you wind up with a net 3.5% increase for the year in question. That is 75% above the 2% goal. I bet your budgets are not off that much.
My daily reading program tells me the housing markets are still tight, with new starts falling 8% in February, with the higher insurance and interest rates not helping matters along with a need for experienced personnel.
Do yourself a favor and take a dive into your accounts payables and the checks you write to pay vendors. I would assign someone or have your system produce today’s line-item charges against what you were paying in prior years to get an indication of which way prices are headed. With the industry in a slump, you would expect prices to be on the negative side, if I added them to that chart I was looking at. In addition, check the invoices coming in and make some phone calls to let your vendors know you are looking at their invoices. And in terms of insurance, I find that by using a real pro who knows the construction business can help you manage your insurance costs if you abide by the terms of the policy. You would be surprised by what you can do to lower rates if someone goes through the policy and helps you understand how you are being charged.
Follow the same process for payroll. Check the reports so you can see who is getting paid and for what they are getting paid. I would also ask for an analysis of hours worked monthly for the last 12 months. Is what you are seeing make sense? Or should you take up a program to review the entire payroll operation to ensure cost is what you expect it to be? If they know you are looking, there will be fewer problem areas popping up.
You now have some homework to do to reduce costs and get the payroll under control. Why don’t you prepare a chart like the one I was looking at and compare your direct expenses in terms of materials and payroll and see how it compares to 12 months ago. And then continue to upgrade that chat every month going forward; just delete the oldest month and add the new one -- just like on the stock market reports you see, a 12-month running total of costs and payroll.
