Builder Biz Tip – Blog / Discussion

A study in 2006 concluded that small residential builders that created and adhered to a formal budgeting process were 26% more profitable than other builders. In these slow times, I’m willing to bet those same builders are doing even better than their competitors.

Budgeting and financial planning go hand-in-hand for builders. Budgeting is a process of projecting cost over an extended period of time and planning expenditures. Financial planning encompasses a plan on creating wealth and measuring your performance. Last week we focused on the business plan. You need to have a clear picture of your business, customers, competitors, and market conditions before you develop a budget and financial plan, otherwise your numbers will not be accurate or even useful.

Let’s start with Accounting 101. Hopefully you have two sets of accounting records. One set is used by your accountant for tax reporting and submitting to your creditors. The format is pretty standard and its use is very limited. Depreciation and capitalization are important concepts for financial accounting. The second set of books is your managerial accounting records. This set of records makes more sense to a builder as it is a guide to show you how you are performing and where to improve. Fixed costs and variable costs (job costing) are important concepts for managerial accounting.

 
Most builders spend plenty of time trying to control the variable costs for each job, which affects the short term. I recommend also creating a line item budget for your fixed costs. Fixed costs include employee wages and benefits, insurance, rent, equipment, marketing and advertising type expenditures. These are expenditures that you can control in the long term. You should periodically do a break-even analysis to insure you are covering your fixed costs. A break-even analysis will provide you the information on how much you need to sell to cover costs.

 
Builders like to build things and to let bean counters worry about the accounting. Remember, your home building business is a business and the numbers are extremely important. You should have an accounting reporting method that is always tracking financial performance. The three main accounting reports are as follows:

1. Profit and Loss Statements: Project revenues and expenses out on a quarterly basis for the next year, and on a yearly basis for the next three years of operation. P&L statements are your guide to long term profitability.
2. Cash Flow Statements: Project all cash receipts and disbursements out on a month-to-month basis for each of the next 12 months to 3 years. Cash Flow statements are your guide to short term sustainability.
3. Balance Sheets: Project your assets, liabilities, and retained earnings (capital) at the end of the first, second and third years. Balance Sheets are your long term wealth scorecards.

Measuring and tracking financial performance is like shooting free throws. How many free throws can you make out of 10? Most people think 4 or 5. Unless you keep score, you don’t really know. Go shoot 10 and tell me how many you really made. You won’t improve unless you keep score.

 
Here are some money saving tips for 2008:

• Be selective about capital purchases as every business has a limit on how much debt it can handle. A loan for “must-have” equipment may make financing that unanticipated “really-must-have” equipment very difficult next month.
• Spend less with wise decisions. Most builders are slower now, so take the time to research more and make better informed decisions.
• Try bartering to save money on goods and services you need. Remember, the barter must be win-win for both parties, so offer something as valuable as what you’ll be getting.
• Make sure you know where every dollar you spend goes. When you make a purchase, ask yourself how it will improve your company’s bottom line. Will it improve sales, bring new leads, or improve operating efficiencies?
• Cut with Precision. Large corporation cost-cutting in hard times is to employ a wide sweeping cost reduction policy. For small business like yours, cost-cutting needs to be implemented with detailed precision. Exercise care and judgment in determining what and where to cut and to what level.
• Don’t cut your marketing efforts. Now is the least expensive time to establish market dominance. Eliminate wasteful marketing dollars, but not marketing efforts. Track your marketing results and simply cut the unproductive efforts. Find new ways to market on the cheap and keep your name out there.

Next week’s topic is about surrounding yourself with smart people who can help you.