Five Actions to Manage Your Finances in a Changing Market
By Steven W. Hays, Sr., CPA
Builders in markets in the midst of a slowdown should take action to minimize the downturn’s economic impact on their businesses.
Five actions to consider include:
- Control fixed general and administrative expenses.
- Develop and monitor budgets for other fixed expenses and capital items closely.
- Control and manage the number of specs and display homes carried.
- Monitor closely the relationship between staffing and sales volume.
- Manage and reduce direct construction costs.
Control All Fixed General and Administrative Expenses
These are the costs of running your office, such as company officer and other salaries, related payroll taxes and fringe benefits, rent, office supplies, training, insurance, travel and entertainment and professional fees.
Since these expenses remain the same regardless of the number of houses closed, they can eat up an increasing percentage of your profits. They should be monitored and, if possible, reduced.
Employees should be cross-trained to better absorb personnel losses. And as always, think twice before you hire anyone new.
Develop Budgets for Other Fixed Expenses, Capital Items — And Monitor Closely
Establish budgets for other fixed costs such as advertising, promotion and donations if you don’t already have them, and stick to them.
For example, if a builder’s total budget for advertising is 1% of sales, all advertising expenses, such as print and media ads, should be monitored during the year to ensure that they don’t exceed the budget.
In addition, create and follow a budget for fixed asset additions — and prioritize the items by need. Also, before making a new asset purchase, conduct a cost-benefit analysis.
One way to reduce the budget on home furnishings in new model homes is to use existing furnishings from older or existing model homes, where possible.
Manage and Control the Number of Spec Homes, Display Models
Base the number of spec houses and models you build on your anticipated closing volume. Too much sitting inventory will have a substantial negative impact on your financing and model home costs.
Closely Monitor Relationships Between Staffing, Sales Volume
Your sales volume must be able to support the number of superintendents, estimators, general laborers and general and administrative staff and subcontractors that you employ.
While your company may have been able to support two superintendents when you were closing on 80 homes, if it has dropped to 40 or 50 units, it is time to take a hard look at keeping both positions or eliminating one.
Manage, Reduce Direct Construction Costs
Slower cycles are an especially good time to review direct construction costs. The impact of even a small reduction in each home’s cost can add significantly to your bottom line.
In particular, value engineering can help determine what features in the base model can be replaced by less costly items that will not reduce the appeal of your product among prospective home buyers.
Go to your subcontractors and suppliers for ideas about reducing costs and finding design alternatives. Ideas that can be duplicated in each of your homes will multiply your savings and, once again, add profits to your bottom line.
Steven W. Hays, Sr., CPA, is partner-in-charge of the Home Builders Services Group of RubinBrown LLP CPAs, in St. Louis. RubinBrown serves more than 35 home builder groups in the Midwest and Florida. For more information, e-mail Hays, call him at 314-290 3336, or visit the RubinBrown Web site at www.rubinbrown.com.
Boost Your Business With Free Biztools Business Guides
Three new builder business guides — created to help NAHB members manage their businesses more effectively and increase their profits — are available free from NAHB.
These Biztools business guides are available free to NAHB members.
Available to members only and downloadable from the NAHB Web site, www.nahb.org, the guides offer members tips on technology, business planning, ensuring the financial health of their business and more.
Produced by NAHB’s Business Management and Information Technology Committee and found in the NAHB Business Management Resources section of the Web site, the 2007 Biztools builder business guides include:
All three concise guides — which include lists of other valuable NAHB Biztools resources — can be downloaded free by clicking here, or by clicking the individual titles above.
Free 2006 Builder Business Guides Also Available
The 2006 Biztools builder business guides are also available free to NAHB members and can be downloaded from the NAHB Web site. The three 2006 guides provide business tips on technology, human resources and measuring profits.
To view or download the 2006 guides, click here.
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.
Resources are added weekly, so bookmark www.nahb.org/biztools to go directly to these vital business management resources.
Local and state home builders associations can link directly to www.nahb.org/biztools from their Web site and give their members instant access to these resources. It will make your HBA's Web site the place to go for the information and guidance that members need to succeed.
Implement Procedures and Standards to Increase Quality
Standardize each step of the construction process by implementing the tools and procedures in “The Scopes of Work Program: Procedures and Standards to Increase Quality,” available through BuilderBooks.com.
Field tested by builders concerned with quality issues, this program has proven to significantly reduce warranty work. "The Scopes of Work Program" will help you:
- Standardize your business
- Gain accountability from field personnel and trade contractors
- Ensure 100% completion by each trade
- Reduce wasted material
- Control your construction costs
- Reduce warranty work
- Increase your bottom line
You can adapt the scopes to meet the demands of your business or codes for your state or county.
To view or purchase this publication online, click here, or call 800- 223-2665 to order.
NAHB Kit Gives Builders Back-to-Basics Tips in Cooling Market
With the current cooling of the nation’s housing market expected to persist into the middle of the year, NAHB has developed a comprehensive online toolkit geared to providing association members with information that will help them prosper in today’s changing business environment.
With the current cooling of the nation’s housing market expected to persist into the middle of next year, NAHB has developed a comprehensive geared to providing association members with information that will help them prosper in today’s changing business environment.
To access the “Back to Basics” toolkit, you must be an NAHB member and have a login to www.nahb.org. To create a login, go to www.nahb.org/login or click on the log-in button on the main menu bar.
For assistance, call the NAHB Member Service Center at 800-368-5242.