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How to Manage in a Cyclical Downturn
Home building is a cyclical industry and there are three truths about cyclical industries that are important to remember. They are:
- The factors influencing the cycle are beyond the control of any one individual or company.
- Most companies in cyclical industries make a lot of money during the good times — and lose money during the bad times.
- Nobody is to blame for a cyclical downturn. Being in a cyclical business is risky. You can't blame investors or mortgage companies because there are always companies willing to take risks during good times. You can't blame land buyers for paying top dollar at the top of the market because every year can be the top of the market in a cyclical industry.
Emerging From the Down Cycle
Companies that are most prepared for a downturn generally emerge as the strongest companies after the downturn. The most prepared companies are:
- Less Aggressive: These companies made fewer significant capital investments just prior to the downturn than their competitors, or had the mechanisms in place (such as joint ventures or options) to renegotiate or abandon those investments if needed. They bought land but they did not bet the company with their land purchases.
- Flush With Cash: These companies have access to their own cash or cash from multiple sources in multiple industries. Serious risk takers generate more cash during the good years and lose more cash during the lean years.
- Efficient: These companies redeployed their cash flows during the good times into improving processes to be the most efficient company during the lean times. Businesses that think long-term generally prosper over the long-term, while those that focus on the short-term have the most difficulty during a down cycle.
- Proactive: These companies proactively respond to the downturn by taking action. You can complain and you can pray — or you can do something proactive to make your company better.
Companies that do not emerge from a downturn are:
- In Denial: These companies spend a great deal of time convincing themselves and their partners that the market will improve soon.
- Cash-Poor: These companies have little access to cash, but spend a lot of time trying to convince those with cash to invest in their companies.
- Inefficient: These companies have a lot of process problems that their competitors do not have.
- Lazy: These companies take little action.
No company is perfect. However, if you find yourself in the latter category above, you had better fix things fast.
What to Do
Look at your company's situation with a clean slate as if you were brought in from the outside to manage a crisis.
We suggest that you do the following:
- Assess the Situation Realistically: What is the most realistic scenario in today's market, particularly for your future communities? Optimistic cash flow projections are more likely to result in future problems than realistic cash flow projections.
- Plan Potential Scenarios: Will there be opportunities created by others' failures? If the market doesn't recover soon, what will you do? What will you wish you would have done?
- Make Informed Decisions: Is there someone who has an overly optimistic or pessimistic outlook on the market, and can you take advantage of that?
- Think Long-Term, Too: Do you have the financial ability to make poor short-term decisions that will pay off in the long-term, such as investing in a new market because the best management team is available today, or hiring "extra" great people to have superior expertise for the future.
Balancing these long-term and short-term decisions is the struggle most leaders face today.
The worst thing you can do is to do nothing. Assess your situation and position yourself for great success.
The article is provided courtesy of John Burns Real Estate Consulting, Inc. based in Irvine, Calif. For more information, call 949-262-3228.
 NAHB Has More Than 300 Resources to Help You Run Your Business More Profitably
Go to NAHB's Business Management Tools Web pages (available to members only) for instant access to more than 300 timesaving, moneymaking and cost-cutting business resources to help you run your business more profitably. Get guidance on accounting and financial management, business strategy, computers and information technology, customer service, human resources and more.
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