Trading Through a Downturn

What a downturn actually looks like from the ute

It rarely announces itself. The enquiries keep coming, so nothing feels wrong for a while — but the character of them changes, and the change is usually visible in your own numbers a month or two before it's obvious in the news.

• Quotes take longer to convert, and more of them go quiet rather than getting a no.
• More price shopping. People who'd have accepted on the spot are now getting two other quotes.
• The mix shifts from projects to problems — fewer renovations and upgrades, more repairs and make-it-lasts.
• Invoices get paid later. Clients who used to pay in a week now pay in a month, and commercial clients stretch further than that.
• Bad debts appear. The client who's slow to pay you is often slow to pay everyone, and some of them won't be trading in six months.
• Competitors get cheaper, sometimes irrationally, as businesses with cash problems start buying work.

The single most useful habit here is watching your own conversion rate and your average days-to-payment month by month. Both move before your bank balance does, and they give you the weeks you need to act deliberately rather than react in a panic.

Which work holds up, and which goes first

Not all trade work is equally exposed. The rule of thumb is simple: work people choose dries up, work people have to do doesn't. When budgets tighten, the new bathroom gets deferred and the burst pipe still gets fixed.

That's a prompt to look at your own mix rather than a forecast. If most of your revenue sits in the right-hand column, you're exposed, and the time to build a base in the left-hand column is before you need it — property managers, strata, real estate agencies, facilities managers, insurance repair panels and maintenance agreements all take months to establish and pay for years.

Tighten the money side before you need to

Most trade businesses that fail in a downturn don't fail because there was no work. They fail because they did work and the money arrived too late, or not at all. Everything on this list is worth doing in good times and non-negotiable in bad ones.

1. Take deposits, and don't start without them. A deposit that covers your materials means you're not funding someone else's cash flow problem. If a client won't pay a deposit, you've learned something useful about how the final invoice would have gone.
2. Break long jobs into progress claims. Bill at agreed stages rather than on completion. It halves your exposure and it surfaces a payment problem while you can still stop work rather than after you've finished.
3. Invoice on the day, chase on the day after. The days you add at the front by invoicing late are free days of credit you've given away. Then run a fixed reminder ladder so chasing isn't a decision you make when you're already frustrated.
4. Check new commercial clients before you extend terms. For anything sizeable from a business you don't know, ask around, look them up, and consider payment up front for the first job. In a downturn the client who happily agrees to 60-day terms is sometimes the one who can't pay in 30.
5. Shorten what you're owed, lengthen what you owe. Talk to your suppliers about terms before you're behind, not after. A merchant you have a good history with would rather agree a plan than chase you.
6. Know your break-even and your buffer. Work out what the business has to turn over each month to cover its fixed costs, and how many months you could run at half that. Those two numbers turn a vague worry into a decision you can time.

How to improve cash flow in a trade business covers the mechanics at both ends, and how to chase an overdue invoice covers the escalation ladder — including the point at which chasing costs more than the debt.

What to cut, and what never to cut

The instinct when things tighten is to cut everything, and it's the wrong instinct. Some costs are the reason you're still trading. Go through your last twelve months of expenses line by line and sort each one into three piles: cut now, review, and protect.

The two that get cut wrongly most often are insurance and marketing. Dropping cover to save a monthly premium is trading a small certain saving for an uncapped risk at exactly the moment you'd least be able to absorb it. And cutting all marketing means the pipeline stops about two months later — the right move is to cut the spending you can't trace to work and keep the spending you can. How to get more work as a tradie covers how to work out which is which.

Materials are the other lever worth pulling properly rather than crudely. Buying cheaper product is usually a false economy on a job you'll be warranting; buying better — consolidating suppliers, getting your account terms reviewed, cutting waste and returns — isn't. How to reduce material costs works through the difference.

Don't buy work with your margin

When quotes stop converting, dropping your price is the obvious move and usually the fatal one. Margin is the buffer that gets you through a bad month; discounting spends the buffer to get busier, which means more hours worked for the same money and less protection when something goes wrong.

It's also the thing your struggling competitors are already doing, and they'll go further than you can. Racing them to the bottom is a race the least sustainable business wins first and loses shortly afterwards.

If you need to move on a job, trade something other than margin:

• Scope. Do less for less. Stage the job, or leave out the part they can do themselves.
• Timing. A discount for letting you slot it into a quiet week is a discount that buys you something.
• Payment terms. A better price for a larger deposit or payment on completion is worth real money to you.
• Volume. Three properties instead of one, or a maintenance agreement instead of a single visit.
• Specification. A different product at a different price point — with the difference explained, and the choice theirs.

And be prepared to let jobs go. A quote you lose on price costs you nothing. A job you win at a loss costs you the money, the week, and the capacity to take the good job that turns up on Thursday.

Holding on to your crew

Wages are usually the largest cost, which makes them the first place people look. But a downturn ends, and the businesses that struggle hardest afterwards are the ones that let good tradies go and then had to find replacements in a tight market.

• Look at hours before heads. Reduced hours, a four-day week or a temporary change to arrangements can carry a business through a quiet stretch with the crew intact. Anything you change has to be agreed properly and put in writing — check the position with Fair Work and the relevant award before you propose it.
• Use quiet weeks on things you never get to. Servicing the vehicles, sorting the van stock, chasing old debts, calling past clients, getting the maintenance agreements written up, fixing the systems. It's not billable, but it's work that pays later.
• Tell people what's happening. A crew that finds out from the rumour mill assumes worse than the truth, and your best tradesperson is the one with the most options elsewhere.
• Protect the standard. Pressure makes rushed work, and rushed work in a downturn produces callbacks and disputes you can least afford.

Frequently asked questions