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How LBM dealers project the future

This month’s Real Issues. Real Answers question comes from an LBM dealer who’s looking for insights on how to craft budgets and projections for the coming year. As we do each month, we share a reader question with LBM Journal followers who have opted in to receive our emails. Thank you to the more than 300 readers who took this month’s survey, and the more than 100 who wrote in with detailed responses about …

Projecting the future

This month’s question was straight forward, so we cut right to the chase and asked our readers directly how they would advise the dealer who submitted this question: “We’re working on budgets and projections for the coming year, and frankly, we’re stumped. With mortgage interest rates continuing to rise, product availability still spotty, many manufacturers announcing price increases, and growing talk about an impending recession, the future seems more uncertain than ever. We’d love to learn how other LBM’ers make their projections. Talk to customers and vendors, read the market info, follow the competition, or…?”

Responses from lumberyards, full-line building material dealers, specialty dealers, and distributors:

“Don’t get too caught up in the details. Budgets and projections are just numbers on a page. It is way more important for your organization to be ready to do what is necessary when the future arrives.”

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“If you are local, you talk to your customers and salespeople. If you are regional, you should factor in your market areas as well.”

“Talk to your core customers and base it on what they have lined up for the year.”

“We have a flat sales budget for 2023. I reduced mill contracts by 25%. I don’t see a problem with getting wood on the open market.”

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“Review budgets weekly. Reforecasting is almost now required, as so many factors vary so dramatically.”

“You listed all the indicators we watch to determine our forecast. With all this uncertainty we have put a major shift on our priorities as a company. Taking customers that traditionally only buy siding and working with them to grow the accounts, trying to close new contractors (not on everything, but on the items we know we can win on), and being more competitive in our pricing to ensure revenue is still flowing. Plan for the worst and perform like a new business trying to win customers. That should end us at a zero sum but usher us out of these times a stronger company.”

“The first half of the year is level. The second half down 20%.”

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“You have to pull the demand projections from your builders and their sales agents. You also have to take a hard look at the valuation change year over year. Most of the materials we sell are costing much less than last year.”

“Get the best intel you can from your key customers and salespeople. Focus projections first on activity and material volume, and then worry about price increases and commodity fluctuations.”

“It is a lot more important to be attentive to state and local economic health than the national picture. From our ground floor management and outside sales team we get a picture far better than the national news might suggest. National builders might be down significantly, but the state level is much less dire. The custom builders are less frantic, but still busy. In short, talk to boots on the ground!”

“You must keep engaged on all projects, large or small. Continue to attempt to build new customers and make sure and retain all current ones. You may need more creative budgeting strategies, and work on much lower margins as costs continue to increase.”

“Attending an economic forecasting session would also help. Don’t forget the old-timers in the room; they have been through the downturns before.”

“Cash is king. Clean up bad inventory. Tighten up your purchasing strategy to maximize dollars. Keep a close eye on your local situation by talking to customers, your bankers, and other trusted advisors.”

“We rely on multiple sources just as listed above, but also pay attention to the local and regional economic forecasts as well as architectural billings. Commercial work tends to be easier to gauge due in part to the time frame from bid date to the time products are needed on site.”

“We read market info, and we visit with our suppliers.”

“We are building our inventory to keep material in stock. We did expect, and are realizing, much slower sales.”

“Play it by ear. You have to have everyday items in stock to do business, and cut back on stocking specialty items.”

“Get closer with both customers and vendors. Also, be open to diversifying through additional business opportunities/streams of income.”

“Read the market info and go with the flow. You have to be willing and able to adapt to the changing market.”

“Talk to your customers and see what they have coming up.”

“We do not do projections. We are small.” “Experience and a long history help. Feedback from contractors also helps quite a bit. See how far they are out on jobs and whether customers are cancelling jobs. We seem to be conservative in our projections and then over-perform as of late. Be cautious and talk to people as much as possible in your industry. You know your company better than anyone. The fed and interest rates are out of your control. Concentrate on going lean if you feel a downturn happening.”

“I think all the above are given. You also need to focus on your market segments that are doing better than others. You’ll need to have a strategy for growth in a down economy.”

“We use a combination of market analysis and communicating with our customers’ needs. Being in a rural area we don’t see some of those wide-spread challenges other lumber dealers face. There have been challenges we all have faced, but we’re not going into a full-on panic. We’re working with the areas in our control, which has gotten us through covid and will get us through these unforeseen challenges.”

“I would plan as I do every year. If you plan for a down year, you will more than likely end up with a slower year. Keep your head to the grindstone and plow forward.”

“Try to take advantage of whatever the market conditions are at the time.”

“Find out from customers what their workload or projections are for this year. Vendors are also a get source in finding information about demand in their market.”

“Do all the above and the check your local home builders’ association. But don’t just react! Plan, innovate, work with buyers, and focus on customer service.”

“We don’t make projections. We are a small yard, and we tell our customers up front what the price and availability is for today, unless the supplier tells us different. Most of our customers understand the situation. If a product is priced too high, we stop stocking it and only order the item if someone wants it.”

“Talk to your local chamber of commerce for information. Listen to financial, national, and regional news.”

“Projections? The world moves too fast. Learn to adapt as quickly as needed. It’s easier to tight the belt than it is to ramp up in order to handle volume.”

“We are seeing price reductions in many areas.”

“Budget what you did in 2019.”

“Talk, listen, and take in all the data you can and then go with your gut and make the best decision for your own business, on your own merits.”

“We spoke with many of our customers trying to get a read on what the next year has in store. Despite what the media is saying, there is a fair bit of optimism, and the feedback has been very positive in our market. We are projecting growth over the next 12 months.”

“We used our 2022 sales as a base and reduced it by about 10% for lower wood prices and another 5% for a slower economy. It’s merely a guess but it sounds scientific because I based it on two conditions—prices and economic activity. But since we don’t pay anyone based on budgets, it doesn’t matter if we’re right or wrong. Our real challenge is adjusting our operating costs to the sales and gross profit dollars we end up generating in the coming year. These numbers plus profit numbers are the basis for all our sales and management compensation.”

“We use a combination of all of the above, along with analyzing any available economic forecast data we can find. We subscribe to a couple of economic forecasting services to attempt to gain some insight on macro-level economic data/forecasts. It is difficult to decipher as we are in numerous geographic markets. Historically, this geographic diversification has helped to insulate us somewhat. Lower commodity lumber pricing also has a significant impact in any 2023 forecast. In uncertain times, we find value in producing multiple forecast scenarios such as a base, down, and worst case scenarios. The most important issue is to determine levers that can be pulled/adjusted effectively based on what scenario we find ourselves to be in.”

“You really need to gather data from all sources to help provide some direction. Talk within your teams as much as you can and prepare accordingly. We tend to err on the side of conservative decisions and that has done well for us over the years.”

“It’s extremely hard this year to make projections. Luckily in our market we had a lot of projects that were committed from 2022 that have rolled over into 2023. Beyond those is where we feel uncertain. Meeting with our top customers is the only way to get a good read on our local market and projections. The majority are confident in their workload through Q3 and are working to round out the year. That being said, we are projecting a flat to slightly down year due to that uncertainty. One thing that the extended lead times have done to the industry is that projects are getting pulled forward to get started and commit to products. This allows for a slightly longer visibility to sales than in the past.”

“Project 10% less than last year.”

“We talk to vendors and customers to guide us through the unknown.”

“It’s difficult with the many unknown variables. We’re mostly talking to vendors and customers/contractors.”

“This is really market dependent. The upper Midwest seems to lag the rest of country when the market drops, and the magnitude of variation here is less (highs are less high, lows come slower). We are projecting about the same as last year, but carefully watching leading indicators (open order files, large project quote backlog, etc.).”

“Wing it/fake it ‘til you make it.”

“Diversify. Find a niche, create one where it doesn’t exist. The time is right to also take a hard look at current SOPs and processes. Downtime is a double-edged sword, look in the mirror and make some adjustments.”

“Analyze what you did last year in which segments and talk to your customers and see what they already have in the works. Discuss the price increases and availability of products with your vendors. Right now, much of this is a guessing game but with proper analyzation you should be able to come up with solid numbers.”

“It’s a combination of all of the above for us. Our sales team is sitting down with our top customers to find out about their upcoming projects and their personal outlook. We stay in contact with local realtors to gauge community trends and listen to what our vendors are seeing in their territories. Read as much market information as possible and monitor trends such as customer count, number of bids submitted, and numbed of bids turned into sales.”

“Project sales 25% lower this year.”

“We are planning on a decrease of about 10% from 2022, which was a record year in sales and profit. We see all of the challenges affecting parts of our business but not all of it and are planning accordingly.”

“Stay green. Protect your balance sheet.”

“Talk to customers and vendors, keep up with market info, read some tea leaves, and have a different bourbon over a large ice cube!”

“We talk to customers, read market info, and look at a three-year history.”

“Put some money in the bank. Take advantage of deals, but don’t overstock. Talk to contractors to find out their bookings.”

“We base budgets on market conditions known, information from our salespeople, and historical info from past recessions.”

“I would recommend speaking with your customers and reading their projections for the coming year. After having an idea of sales volume in relation to the previous year, I would weigh the commodity sales to a projected mean rate for the next year and add non- commodity projections to get a total sales projection.”

“You have to gather every bit of information you can. Consider the information along with your experience and hash it out with your stakeholders.”

“We are facing the same issues, but feel we will see a decrease this year in overall sales volume with a deflationary headwind on lumber pricing after the heights it reached last year.”

“Look at your budget from Q1 2020 and use that target for sales level for Q1 2023. And add 2% to the expense line.”

“Add 10% per quarter.”

“First you must work hard to keep a balance of new construction and remodeling business to insulate the swings. Also, focus on the ancillary products that can increase each ticket. Stay focused on service levels so you can maintain or increase margin instead of eroding it. Out-work your competitors and increase face-to-face by the sales team. Put your head down, drive through, and control the things you can. Don’t focus on the things you can’t.”

“Generally, we tend to lean more on market information, but we also listen to what our customers and vendors have to say.”

“Demand for housing still outpaces supply. I still see strength in the market. We may not be up 20% in 2023, but I expect to retain the growth from 2022.”

“Look at your customer base and determine where the sales are coming from: commercial, track builders, custom builders, or remodelers. Then where is the money coming from, bank, cash, out of state, etc.? The answer to those issues will determine if you can duplicate or grow last year’s numbers. Then, subtract a percentage for inflation. It’s not going to be perfect but should put you in the ballpark.”

“Try to stay debt free as possible. No extra inventory, vehicle purchases, etc.”

“We figure that sales will be down.”

“I have always asked contractors how far out on work they are. Also, are customers cancelling jobs on them? The feel-good scenario is also telling. a) housing appreciation b) stocks/401(k) c) interest rates. Basically, a scared customer delays big purchases or reconsiders.”

“I received some advice recently that I believe is a good starting point for 2023, and that is to look at 2018/2019 results. From a price point comparison, it makes sense but as we know the market/environment is much different. I say take results from 2018/2019 and use as a starting point. I believe in setting a quarterly or a half year goal and then build in enough flexibility to adjust as the year progresses. Stay focused on your people and building an empowered team. These people are who will take you through uncertain times.”

“Base projections on current market information, plus talk to your vendors and customers.”

“We are rural, so we don’t see the high highs or the low lows. However, interest rate hikes continue to be a topic of conversation. We think it will slow the spec and first home buyer models, but custom and multi-family continue to be a sweet spot.”

“We talk to our customers and get a good sense of how they are looking for the coming year. Keep an eye on cement trucks, as it is always a good sign seeing them out and about. Vendor information can sometimes be clouded by the desire to seem like they are doing well…you wouldn’t want to go to an empty restaurant, would you?”

“Follow several sources of social media that provide information and feedback on what is happening with the economy as it directly relates to the LBM business model.”

“We don’t spend too much time on nailing down a projection. After taking a variety of inputs from internal and external sources, we just try to make sure we are positioned well financially, with cash on hand and good lines of credit to weather a storm or take advantage of growth. Perhaps it’s reactionary, but projections have lost their usefulness since 2020.”

“What works for me is keeping up-to-date on national and international economic trends in printed news sources and watching our industrial accounts. We supply a few manufacturers of machine tools and equipment. Their orders tend to show a six to 12-month lag to future economic conditions.”

“Talk with customers/contractors regarding their bids and upcoming projects and schedules. From there, discuss with vendors regarding material supply chains to gauge whether or not to buy ahead for slated projects and if so, how far ahead.”

“We have talked to our biggest customers, and they are saying they’ve slowed way down for the first quarter of 2023 and will look at the economy in the spring.”

“Right now, we are talking to our local manufacturer reps about availability and coming up with a plan to service our customers with a minimum amount of inventory on hand. We believe there will be some price concessions in the first and second quarters of 2023.”

Responses from wholesale distributors, manufacturers, and service providers:

“Market info can typically be skewed based upon geographical location. Get a synopsis based around market info trends and local customers to get a macro view.”

“Ask customers about the products they want. Ask vendors what they can offer that is in line with demand. The market is too varied to rely on any one competitor.”

“As an office wholesaler of LBM, we cannot appraise a retailer about a brick and mortar location. I would recommend having a breakfast or lunch with those 20% of customers that represent 80% of your sales/profits (i.e. the Rule of 20/80, AKA The Pareto Principal). They will steer you right, and they are a rifle-shot approach to your business; anyone else’s recommendation will not represent your area/business.”

“You can only make educated guesses based on conversations with trusted customers. Even then, you are relying on their best guesses. Large corporate builders that must deliver results may give a more accurate projection.”

“I would have them review their current ERP software to ensure that it is meeting their current and future needs. Are they looking to grow their business or continue to tread water?”

“We talk to our dealers, look at housing starts and interest rates. We feel most of the interest hikes have been factored into the rate of starts and things will keep going as they are now.”

“Concentrate on things within your control, such as cost reduction and market-share improvement. I would not expect inflationary help on sales for 2023. Depending on your position in lumber and commodities, deflationary pressures on growth could exist.”

“First, have your own game plan that focuses on the metrics you can control. Then discuss with customers, vendors, and other business partners to make sure your plans are realistic and attainable.”

“If you follow the competition, you have already lost, as you have not differentiated your company nor provided customers with a meaningful reason to buy from you. I would certainly include feedback from key customers and vendors and would also get feedback from potential vendors who have been pursuing your business, but don’t have it today. They may have new and innovative products and services to help drive business. I would also develop two different budgets, one that assumes stable sales for Q1 and Q2 and moderate revenue and profit growth for Q3 and Q4. The second budget would assume a slow decline in revenue and profits quarter-over-quarter throughout the entirety of the year inclusive of all necessary business adjustments that will need to be made and when in order to sustain the business and position it to take advantage of a stronger market when that shift occurs.”

“If you’re concerned about sales volume dropping, cut back your budget accordingly. This will require some hard decisions about appropriate expense reduction, especially payroll. If you have ‘softer’ expense items in your budget, hit them first.”

“Based on contractor feedback, many are still booked through mid-year and beyond. Labor and material shortages seem to have dragged things out. Higher-end projects are still strong.”

“Reduce inventory and keep a close eye on operating expenses.”

“Follow the workload of current customers and requests from new customers that are experiencing challenges in the market. Challenges that exist on each side of their transaction, from product procurement to sale. There is no crystal ball. It’s dangerous to follow rather than be proactive, but these are trying times.”

“Some of the data we read involves the South where we see people moving to our area.”

“I would base your budget off 2019 actual results. That was the last ‘typical’ year in our industry. I would not budget price increases into your budget in 2023 unless your business is mostly repair and remodeling driven. New construction, especially single family residential, will be significantly down this year due to interest rate hikes, and more hikes are coming. I would budget new construction product lines flat to down and products tied to R&R up slightly…but without the price increases we’ve seen over the past two years.”

“As a construction software company, we are focused on three things. First, listening to our builder customers and prospects and the specific challenges they’re facing, from predicting profit before they bid to accurately tracking project progress change orders, etc. Step two for us is to revise our software to better meet builder needs without needing to significantly raise our prices. And most critical, is step three—we’re enhancing the way our software can connect builders to dealers directly, keeping both sides of the construction equation informed and in communication. We’ve shifted to a partnership model, and it seems to be working well.”

“I’m speaking on the products and services that represent the outdoor living market segment. Although the exceptional growth you have enjoyed since 2019 will begin to come back, more along the lines of 2018, remain bullish in your inventory. Consider a more narrow and deep inventory strategy so your customers know they can count on you for the decking, railing and porch needs.”

“With all the information available today, the best advice is to follow your gut feeling. Yes, business will be very different than the last two years, so pay attention and you will survive. Don’t overlook all the indicators.”

HAVE A REAL ISSUE?
CONTACT: Rick@LBMJournal.com

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