Plenty of Lessons Past and PresentJanuary 3, 2022

Plenty of Lessons Past and Present

By: William C. McNamara, CPA, CCIFP®

What lessons and knowledge have we gained in 2021? A great question many business owners should consider. Believing that I have learned way more in hard times than good, 2021 was a very good year for learning. Simply getting it right out of the box has taught me little. But problem-solving through trial and error, these undertakings provide life lessons that never leave you. As the pandemic has shown us all, we need to have flexibility to change directions when new circumstances present themselves. As business models for 2022 are planned and modified here are some results and risks from 2021 to consider.

An industry annual survey conducted by the Construction Finance Management Association (CFMA) and completed in July 2021 published some important benchmarks for contractors. While the survey covers numerous areas of a company’s financial health, earning reports are always critical. The 1,207 companies who responded and shared their detailed financial results reflected return on equity values of 30% and return on asset results of 13%. While not huge gains, both ratios trended positively from the prior year. 80% of the respondents received federal funding under the Payroll Protection Program. This infusion of capital to small businesses provided relief during the most critical times of COVID. Managed efficiently, these PPP loans will provide liquidity cushions entering 2022.

The U.S. Bureau of Labor Statistics tracked job losses for the period February 2020 through November of 2021, the construction industry has seen a net loss in employment by 115,000 positions. The reduction in construction industry jobs may be good news in disguise since it is relatively lower than the leisure and hospitality industry which lost 1,334,000 positions. The question becomes; Who will fill those openings? The Sage Policy Group, Inc.’s Chief Economist Anirban Basu, MPP, MA, JD, PhD points to the losses incurred in enrollment at vocational schools as a significant factor to the shortage in the skilled labor market. Many parents have felt that college was the gateway for their child to obtain middle-class status. However, Dr. Basu notes we now see that the “heavily indebted college student, proficient in 18th century French literature, missed their calling as being an extremely awesome welder and highly employable”.

Developing a plan to measure risks has proved invaluable in the past 24 months. Classical risks business owners often evaluate are inflation, interest rates, and customer demand. Well in 2021, those risks have been easily mitigated. The Federal Reserve has kept inflation and interest rates in check. The market demand for new housing is ravenous. Labor, skilled labor specifically, is a shortage and risk factor for a builder. But price increases in materials clearly became risk #1 in 2021 and has turned profit margins upside down. Modifying contract language to include material escalation provisions and force majeure clauses have been needed lifelines for builders.

Risks are not always a tangible physical item. Often the scary and highly expensive risks are the “new” attributes undertaken by a contractor. Examples include job size, geographic location, end markets, supply chains, or customer expectations. Every company has a sweet spot. It’s the intersection of where they perform best at meeting their client’s expectations. We deliver a quality product under a reasonable timeline and with a rewarding profit margin. We would do these jobs 24/7/365. Due to factors generated both internally and externally, we are not always operating in that location. So how do we go about assessing risks for “new” attributes and opportunities? Let’s think of that sweet spot as a bullseye on a dartboard. Picture the red round center area with black rings expanding outwards. Each one of those “new” items is another ring pushing out away from the sweet spot. When we undertake new endeavors that risk takes us away from our strengths. So how comfortable and prepared are you as you move away from the bull’s eye?

Many forecasters anticipated changes in the tax laws by the time we got to 2022. The Build Back Better Act has stalled in Washington, D.C. How that gets moved forward will invariably lead to revised tax regulations in hopes to garner support to ensure the Act’s passage. While there have been some modest tweaks to the tax code, we enter 2022 as we entered 2021 or 2020. Anticipated expectations in 2022 see Corporate tax rates moving from 21% to 28%, the Estate lifetime exclusion dropping from $10 million down to $5 million. Upon enactment, those items will be absorbed and prove not to be disruptive to day-to-day operations. Contrasting, an income tax surcharge proposed on certain highly compensated taxpayers is a concept surely to bloody a nose or two. For how long the song remains the same is tough to say. Current projections have us looking at new legislation in the first quarter of 2022. But this is a mid-term election cycle, so who knows. A much closer than expected New Jersey Governor’s race this past November has impacted our state legislative process as well. We will see unexpected changes in the leadership of our state senate as they work with Governor Murphy during his second four-year term.

Collectively these items shape how we move forward in 2022. No easy answers, no one size fits all solution. We gain confidence with each hurdle cleared, pausing to study and outwit the next.

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