Critical Management Reports For Homebuilders presented by Mike Benshoof, Vice President and Partner SMA Consulting When events are measured: results improve. When feedback is provided the rate of improvement accelerates. Thomas Monson FLORIDA OFFICE: 7380 Sand Lake Road Suite 500 Orlando, FL 32819 Phone: 407.447.5209 Contact Information: CALIFORNIA OFFICE: 1003 East Cooley Drive Suite 207 Colton, CA 92324 Phone: 909.420.0200 www.smaconsulting.net Copyright SMA Consulting 2006 SEBC / Page 1
Report # 1 The Gross Profit or Job Profit Analysis Report In a stable environment: The gross profit report should be produced monthly to analyze the profitability of closed jobs. We have found that running this report, including all units that have closed 30 days or more ago, will yield the most accurate results. This allows all the related job costs to be charged and entered into the job cost accounting system. For accurate analysis of more current jobs you need to ensure that all committed costs (unpaid purchase orders, etc.) are accrued into direct costs and that all variance purchase orders (VPO) are up to date and entered into the system. The report basically compares sales price with cost of sales including land at market value and direct construction costs to yield gross profit dollars and percent figures. This report can be sorted by model type or by project or geographic market location to compare the profitability differences within your operation. In a less than stable environment: Under less than stable conditions, in terms of job cost control, best business practice insists upon this report being updated and analyzed weekly for all jobs under construction. This is an intense undertaking with the joint efforts of the accounting and purchasing departments. The difficulty in keeping the VPOs up to date and projecting the committed costs is made a little easier if a computerized construction schedule is tied to the job cost accounting and PO system. There is no substitute for this level of effort, however, it will be for naught if the most senior levels of management do not then use this information to hold people and processes accountable and take action when variances occur to prevent recurrence ASAP. This cannot be overemphasized! Handy Hint: Gross Profit Report RED FLAG ANALYSIS The level of detail in this report isolates problems at the unit level. When the profitability of one unit is higher than another, analyze what made the process better in the more profitable one. Individual units should also be evaluated in terms of meeting company goals. If the profitability on one unit is below company goals, steps should be taken to pinpoint the problem and correct it on future units. Gross Profit by Month by Community or Project Copyright SMA Consulting 2007 International Builders Show / Page 2
Gross Profit Summary Report by Month & Year to Date Sample Gross Profit on Closed Jobs by Community Summary: Frequency = Monthly This report is one that lends itself well to graphic illustration and trend analysis. Illustration #1 is a classic gross profit bar graph. The communities are on the horizontal axis; the profit, expressed as a percentage of sales revenue, is on the vertical axis. The dark line represents the goal or budgeted profit percentage for the year. Copyright SMA Consulting 2007 International Builders Show / Page 3
Report # 2 Income Statement Nine Column Formats The income statement should be produced monthly except for the very smallest volume builders. For these smaller volume builders, quarterly statements are mandatory. The important ingredient is to compare the actual results with the operational budget, and to monitor and manage by exception or variance. The income statement is presented here in two formats summary and detail. The detail version lists each account and its end of period balance. The summary version lists categories of like accounts in a specific grouping and is much shorter. Tracking results as a year to date (YTD) percentage of sales in columns 7-9 allows the manager to compare operational results between years with different sales volumes. It also allows comparison against industry standards and company benchmarks (goals or budgets) that are usually stated as percentages of total sales dollars. The income statement format that SMA endorses has monthly and YTD columns that compare actual results to budget, and then express the variances in dollars. The last three columns represent the YTD budget and YTD actual results and the variance in percentages of sales revenue. Summary Version of Nine Column Income Statement Summary Income Statement note sub category breakouts example all advertising is budgeted at 1% of revenue and is actually running 1.2% YTD. Copyright SMA Consulting 2007 International Builders Show / Page 4
Detailed Version of Nine Column Income Statement This detailed income statement only includes the indirect cost section of BuilderCo s full report. It has been abbreviated to save space in this document. Handy Hint: Income Statement Report RED FLAG ANALYSIS Remember that fluctuations in sales revenue for any monthly period will have great impact on the stability of the monthly numbers as a percentage of revenue. Therefore only evaluate monthly numbers as dollars against their respective budgets. YTD numbers can best be used when comparing against percentage of sales revenue benchmarks. Copyright SMA Consulting 2007 International Builders Show / Page 5
Report # 3 Comparative Balance Sheet & Ratio Analysis The Balance Sheet is a listing of all assets owned and all liabilities owed by the organization. The difference between the assets and the liabilities is stated as the equity of the business. Produced monthly, this report gives cash balances, allows tracking of how much the business owes, and how much is owed to the business. Our prescribed best management practice is to develop reports that compare balance sheet numbers from period to period. The movement within the period is as revealing as the raw final numbers themselves in an analysis of the trends of the organization. The full blown balance sheet report is on the next two pages. Assets are on one page and Liabilities and Equity Sections on the next. These figures are used to calculate operational ratios, which have wide use as financial monitoring tools in the banking and credit industries, and can be used as monitoring tools to measure the trends within your company. Some of the ration calculations require you to average the beginning and ending balances in an account. This is obviously made possible when the balance sheet is reported in this comparative format. The ratio analysis report shows but some of the ratios businesses may want to track. We consider the ones represented on the report to be key business drivers and a minimum of what should be tracked by moderate size and larger homebuilders. These represent established industry formulas for indicating the financial strength of a construction company. Handy Hint: Ratio Report RED FLAG ANALYSIS The Cash Coverage ratio is a critical one for any small business especially one as AP intense as homebuilding. This is the amount owed now against the amount of cash on hand. Copyright SMA Consulting 2007 International Builders Show / Page 6
The balance sheet gives great information for bank packages (debt to equity & return on equity), company solvency (current ratio and cash coverage ratio) and for operational efficiency (inventory turn ratio and interest coverage ratio). Report Frequency = Monthly. The delta or variance column points out the changes from last period same timing. Copyright SMA Consulting 2007 International Builders Show / Page 7
Report # 4 Cash Flow Forecast Report This report is actually a budgeted report that is updated monthly during the fiscal year to measure the sources and uses of cash for the months that have occurred, and to project the cash requirements for the operation during the months that follow. Several schedules feed information into this report. The most crucial of these is a production/closing schedule that reveals when construction loan draws will be received at each phase of construction for each unit. This allows the manager to project what cash will be received into the operation at what intervals. It is important to analyze past history with regard to length of construction phase cycles at various times of the year to produce an accurate schedule. This report, when set up and utilized properly, will allow the manager ample time to plan for lines of credit, etc., when operational cash flow will be scarce. It will also allow for better investment decisions when cash flow is more positive. Report frequency is weekly or updated for each pay date and again at the end of each month and reporting period. Copyright SMA Consulting 2007 International Builders Show / Page 8
Report # 5 Traffic, Sales, Starts and Closing Report This is a key operational information report. In many cases, it is the most used report in the moderate size and larger builder s organization. It tracks sales, starts and closings for the past week, month to date and year to date against established budgets. Report frequency is weekly with updates at the end of each month and at the end of the year. It also tracks traffic for each period in actual count numbers as determined by your company s definition of an actual traffic unit. Sales fallout or cancellations are also tracked and not netted against sales. The sales equation will always be Total Sales (Purchase Agreements Approved) = Fallout & Eventual Closings. With the addition of some advertising $ advertising efficiency calculations can be made in the Other Metrics section. Never use the closing ratio as a reward or quota tool with your sales staff. Doing so motivates the team to report as few traffic units as possible. Copyright SMA Consulting 2007 International Builders Show / Page 9
Report # 6 Weekly Job Cost Variance Under Construction Rpt. This report is designed for those companies who are just starting in their variance control efforts or are having problems with them. This is a very labor intensive report. If your job cost variances are somewhat under control and consistent you may be able to save a great deal of administrative effort by using report number 7 alone to monitor variance results. On the next page is the detailed report for one job that you can use to gather the information for this report. Handy Hint: UC Variance Report RED FLAG ANALYSIS You must be careful in projecting the actual eventual variance percentages based up the current percentage and the percentage of construction complete. This can be misleading and must be updated weekly when this report is being used. Copyright SMA Consulting 2007 International Builders Show / Page 10
Handy Hint: Job Cost Variance Reporting RED FLAG ANALYSIS It is easy to confuse the formula for calculation of job cost variances. The most meaningful percentage to track is the percent of variances against the final job cost budget. That is budget not sales price or revenue. If you use sales price, then changes (up or down) in sales price will impact variance percentage even though nothing changed in the actual costs or in Copyright SMA Consulting 2007 International Builders Show / Page 11
Report # 7 Job Cost Variance Report on Closed Jobs Rolling Average Format The sample report provided here is an example of a rolling average calculation of variance percentage (from total cost budget) for the homes closed over the past twelve months. This allows the type of graph represented in the sample graphic report Variance Percentage Trend Analysis (see page 17) to be produced. Sometimes when we look at each job individually for too long we stop seeing the forest for the trees. This 12 month rolling average chart report gets us back to looking at the two minute report of job cost control for the company on a consolidated basis. This is the senior managers job cost variance report. It should be updated monthly. Handy Hint: Job Cost Variance Reporting RED FLAG ANALYSIS You will note in this example that we are tracking the rolling average variance percentage and also the rolling average # of VPOs written per job. The later metric tells us a great deal about the efficiency and accuracy of our estimates. Years ago we calculated that each variance costs over $20 in overhead costs in addition to the actual variance dollar amount. I m sure it is closer to $50 today. Copyright SMA Consulting 2007 International Builders Show / Page 12
Sample Graphic Report Variance Percentage Trend Analysis. Frequency = Monthly. This graphic report is a great example of the ultimate two minute report. It gives you an update on the most recent measurements impact upon the rolling average and lets management know what direction the trend is going. In this case, a downward trend line is a positive measurement. It has, recently, shown a two month upward movement and would indicate the need to get into the detailed reports to the project, builder or job level over the past two months to find the source of this negative movement. Handy Hint: Job Cost Variance Reporting RED FLAG ANALYSIS Note the solid dark benchmark line running across the sample graph at the 1.5% point of variance as a % of cost budget. This is the goal or budget of BuilderCo for the year. This line gives even greater clarity to the question are we running at or better that budget. This is another example of the efficiency of this reporting technique. Copyright SMA Consulting 2007 International Builders Show / Page 13
Report # 8 Cost Per Square Foot Pricing Analysis Report Copyright SMA Consulting 2007 International Builders Show / Page 14
This report calculates cost per square foot for each item on your job cost breakout. These figures can be used to compare costs within projects or divisions and within model types. They are used as tools for preliminary gross profit budgeting and base plan pricing. This information is the foundation of any estimating program (manual or computerized) for all builders. Historical data (actual results) is the most accurate information a builder can use to develop pricing on new units and adjust pricing on existing units. Doing this work by hand is tedious; however the benefit is developing realistic purchase unit based budgets. Computerized spreadsheets can help simplify the process by performing much of the data calculation. Pricing analysis based upon this information is referred to as Cost Based Pricing. It can only stand alone in your pricing model in the most positive of market conditions. None the less, it should be at the forefront of every pricing strategy for any builder in any market conditions. It may need to be tempered with pricing analysis based upon the competitive market but it should always be calculated. Report # 9 Customer Service & Warranty Report This report summarized the number of warranty requests, the requests outstanding, and the average number of days requests are outstanding. It also identifies trade contractors with more than an acceptable number of outstanding service requests. This information will allow a manager to compare the current state of service work against company standards. It will help prevent those little things that mean so much to your success from falling through the cracks. Copyright SMA Consulting 2007 International Builders Show / Page 15
Report # 10 Customer Satisfaction Trend Report This is another rolling average trend analysis report. Customer satisfaction scores lend themselves well to this type of analysis. Most builders with moderate volume will find this the best way to analyze the results of their customer satisfaction surveys. Frequency = Monthly. Data comes from Customer Survey database or Excel Spreadsheet. The Would You Recommend number measured here is but one measurement of customer satisfaction. It is an industry standard when measured as a yes or no response to the question: Would you recommend (WYR) BuilderCo to your family and friends who need a new home? Yes if yes and anything else counts as a no. This is the most accurate way to measure and compare your results to industry standards. The result is sated as a percentage of yes responses to the total sample size. Handy Hint: Customer Satisfaction RED FLAG ANALYSIS Best management practices states that the goal for customer satisfaction should be approximately 95%. This is the industry standard for cost effective results from the WYR question. More would be better, but most agree that the last 5% can be most costly to obtain. More so than is reasonable. Copyright SMA Consulting 2007 International Builders Show / Page 16