Fall 2008 issue of Horizons

INDUSTRY ◆

HOME BUILDERS

What Are the “Top 10” Numbers in Managing Your Home Building Company to Success?

3. Gross Margin

Net Sales (Developed Lot Costs) (Direct Construction Costs) Gross Margin

A measure of dollars remaining after direct costs of construction are deducted in order to cover remaining variable and fixed costs. Gross margin decreases represent a home builder giving the home buyer “too much house for the sales price.” The key to maintaining an adequate gross margin is buying a piece of land at the right price and designing your base home (direct construction costs) correctly. Total “direct” costs of construction (developed lot costs and direct construction costs) should not be more than 80 percent of the sales price in today’s market. 4. Gross Profit Percentage Gross Profit Net Sales A measure of gross profit dollars generated by each dollar of sales. The difference between gross margin and gross profit is the inclusion of indirect construction costs. This key financial measure represents a home builder’s ability to cover or absorb other operating expenses. If a home builder cannot maintain an adequate gross profit percentage, it is unlikely he or she can obtain an acceptable net profit percentage. Maintaining an acceptable gross profit percentage is essential to long-term economic viability. 5. Break-Even Fixed Costs or Expenses (Unit Price - Variable Unit Cost) Number of units that must be closed in order to cover all costs and expenses of the company. This calculation assumes zero profit. Break-even analysis is a tool to calculate the sales volume at which the variable and fixed costs of producing a home will be recovered. The break-even point is the point at which your homes stop costing you money to produce and sell and start to generate a profit for your company.

By Steve Hays, CPA

1. Net Income (Profit) Percentage (Return on Sales) Net Income Net Sales A measure of net income dollars generated by each dollar of sales. Net income (profit) percentage is the most important number to manage. Often referred to as “the bottom line,” it typically is the first number an owner, banker or investor looks at for the overall health of the company. Certain cost savings are said to drop straight to the bottom line and a dollar savings in certain cost areas increases your net income by that same dollar. 2. Direct Construction Costs Percentage Direct Construction Costs Net Sales A measure of direct construction cost dollars spent for each dollar of sales generated. They are the biggest costs a home builder incurs, yet some builders do little to control these costs. Managing this number – the “sticks and bricks” that go into a house – is critical. A common characteristic of the best builders is their ability to monitor and manage direct construction costs. Even a small reduction in direct construction costs as a percentage of sales price can significantly increase a builder’s bottom line. Any costs that can be removed or decreased from a house and multiplied with direct construction cost savings from other units can provide substantial income improvement.

33 ◆ fall 2008 issue