It is no secret that markets go up and down. Some climates are easy to conduct business in and some are an absolute nightmare. The past decade has been uncommonly profitable for most industries. However, COVID really derailed some businesses that could have potentially positioned themselves better.
Business Models and Industries
Depending on the type of business you run and the industry that it operates in, there will be a variety of different struggles and different factors that increase and decrease a companies profit. For the sake of this article, we’ll cover a few industries: Manufacturing, Industrials (such as construction) and transportation (primarily trucking and freight brokerage).
1. Manufacturing Companies
Owners of manufacturing companies are no strangers to market troubles. In fact, manufacturing has been one of the most problematic industries to operate. US based manufacturing has declined at a rapid rate as the industry has increasingly just shipped products that have been manufactured in China.
2. Construction Companies
Construction has been a market that typically does better coming out of a market recession. This is largely due to the fact that interest rates have been lowered and many people have been laid off. Oftentimes, these people will still have the ability to hammer nails and therefore go to work for construction companies.
Consumers typically build more homes when there are low interest rates (after a recession) and the government will typically spend more money on fixing the public infrastructure and pay construction contractors to build new public buildings such as high schools and city centers.
3. Transportation Companies
Transportation is seen as a far more defensive industry than either construction or manufacturing. However, it is not immune to downturns in the economy either. The staple of the transportation industry is businesses shipping products to other businesses. This means that lumber, wheat, oil and other commodities all have to be transported via train, semi truck or occasionally by pipeline to their destination and this happens when the economy is working well. Carriers and brokers are working together, they’re connected more than ever before, and with the help of transportation and fleet management systems, they are more organized and the process is a lot smoother.
Unlike construction, transportation is a very asset intensive business which means that the transportation business owners often take out loans to buy trucks, fix trains and construct pipelines. This means that, similar to manufacturing businesses, this industry is very sensitive to the Fed hiking interest rates.
Distressed businesses
When the interest rate hike happens, it increases expenses for many businesses. This means that companies that are barely profitable end up being insolvent. These companies will often attempt to find ways out of the cash flow hole that they find themselves in. However, this typically doesn’t end well. There are a number of ways to minimize corporate debt and increase the amount of free cash flow in a business.
1. Monitoring Cash Flow
One of the primary ways that business owners try to get out of debt is by eliminating expenses that don’t clearly manifest themselves in more sales each month. This typically means that they cut the marketing expense.
The problem with this is that you may have a bit more cash left over after month one and two, but when there are no more customers coming in, it ends up harming the business an increasing amount on months 3+. This rarely helps businesses with negative cash flow become solvent again.
2. Hiring a turnaround advisor
You may find that it makes sense to hire a turnaround advisor. Many business owners suffer from the idea that they know better than everyone else how to run their business. While this may or may not be true, the majority of these same business owners know very little about cash flow, debt restructuring or offers in compromise.
Many business owners will find that a turnaround advisor is worth ten times their fee. Unfortunately, some don’t find this out until it’s too late and there is very little business left to save.
Rising rates and fewer customers
The majority of the struggles that small and mid-sized businesses face can be summarized into two separate categories; Not enough customers and rising rates. We’ll unpack each of these individually.
1. Fewer customers
As economic markets and job markets weaken, consumers have less cash and less free income to spend. When this happens, many businesses find that they are unable to purchase as many products and services as they did previously.
When these tough economic times do hit, consumers will still spend on utilities, essential products such as groceries and clothing. However, if you are manufacturing golf equipment, you may find that your consumers can no longer find the discretionary income in their budget to buy the products that you manufacture. The same is true if you are a construction company that remodels homes. These consumers just may not have the cash to spend on your service.
2. Rising Rates
When the economy has been performing well for a period of time, the federal reserve may elect to raise interest rates. This means that banks have to pay more interest to the Fed and therefore need to charge more interest to small business owners and individuals on their loans.
If you are a business owner, you may find yourself purchasing business assets or even a competitors business on a loan. If rates are high, you’ll obviously have to pay more interest which can be difficult.
Recommended Reading: Factors Affecting Freight Shipping Rates
Salman is a prolific environmental writer, and has authored more than 500 articles in reputed journals, magazines and websites. He is proactively engaged in creating mass awareness on renewable energy, waste management, sustainability and conservation all over the world.
Salman can be reached on salman@cleantechloops.com
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