By Anne Balogh
In the competitive homebuilding and remodeling business, the firms that track their financial performance and compare the results with those of other builders are better able to gauge where they stand and set realistic goals for future growth. But exactly which numbers, or financial benchmarks, tell builders how they're doing?
That was a topic of discussion at the 2006 International Builders’ Show in a seminar presented by Steve Maltzman, president of SMA Consulting and a CPA with more than 19 years of experience as a controller and chief financial officer for various building and remodeling firms. He contends that the most important use of financial results is for management purposes, which uses a different type of accounting than the generally accepted accounting practices (GAAP) used to report financial results to bankers and investors or the numbers used for tax purposes.
Gross profit is the magic
The key area in which management accounting differs from GAAP and tax reporting is in how a builder reports construction costs. Steve emphasized that gross profit margin is the magic number in the homebuilding business. Smaller custom builders (companies who build on owners’ lots) typically experience less growth and have lower net profits than high-volume production builders. So he advised smaller builders not to be afraid to raise their margins.
For management purposes, gross profit margin equals sales less "sticks and bricks" (direct construction costs) and land at market value. Builders need to strip out land profit and appreciation to find out what they made on the house itself, not diluted by lot costs, Steve explained. All indirect construction costs, such as warranties and service and construction supervision, are categorized as operating expenses rather than being allocated to homes.
Which numbers to benchmark
In looking at builder benchmarks, Steve stressed the importance of making "apples to apples" comparisons of cost and expense data and separating financial benchmarks from operational benchmarks. The five categories of operational benchmarks Steve recommended scrutinizing are:
- Efficiency and productivity
- Sales and marketing (focusing on areas such as referral rates and advertising costs per number of sales contracts)
- Quality (of both service and product)
- Schedule and construction (includes time-of-construction measures and weekly/monthly measurements of annualized production gains)
- Customer satisfaction (based on client surveys)
Comparing results
Once you do the number crunching to compute your financial benchmarks, where do you go to get a glimpse of other builders’ books to see how your numbers stack up?
Steve recommended two resources. The first is the National Association of Home Builders’ Cost of Doing Business Study, which reports the results of a financial survey of NAHB members. A new edition was published early in 2006 and provides data gathered in 2005 from more than 350 homebuilders, including their profitability, cost of sales and expenses. NAHB also publishes a separate Remodelers’ Cost of Doing Business Study reporting financial data from remodeling firms. Both publications are available at www.builderbooks.com.
Another resource is NAHB’s 20 Clubs program, which gives builders and remodelers an opportunity to network with similar non-competing firms throughout the country. Each year, 20 Club members submit their financial results in a standard format. An analysis of the results is performed and sorted into various categories, so members can compare their results with those of the group overall. (Details about the program and applications for membership are available at www.nahb.org.)
When it comes to the area of operations, such as efficiency and productivity, it’s more difficult to obtain outside benchmarks you can compare your numbers to. Steve suggested accumulating these benchmarks internally and measuring against internal targets, aiming for your own company's "personal best."
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