Money Ball: Understanding the Numbers of Homebuilding
February 2012
Presented by: Bob Whitten Financial Model
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Financial Model
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Definition of Gross Profit – NAHB & SMA
Sales Revenue Less: Cost of Goods Sold Land at Market Value Direct Construction Costs = Gross Profit
GP = “The Key Business Driver for Homebuilders”
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What is in Direct Construction Cost?
• Permits & impact fees • Sticks • Bricks • Trade labor • Construction utilities • Dumpster (if per home) • Your closing costs
Anything attributable to a single house
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What is NOT in Direct Cost of Sales?
• Superintendent Wages • Sales Commissions • Construction loan interest • Vehicles and related expense • Shared Dumpsters & Portajohns • Other wages of employees
No Allocations!
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Calculation of Contribution Margin
Gross Profit Less: Variable Costs Sales Commissions Construction Loan Interest = Contribution Margin
CM = Contribution from job to cover overhead and result in profit.
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Total Expenses (Overhead)**
• Indirect Construction Expenses (4.0%) • Sales & Marketing (6.0%) • Finance Expenses (1.5%)
• G&A Expenses (4.5%) • Total Expenses (16.0%)
** Variable & Fixed Expenses are both included above
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Indirect Construction Expense
• Field Expenses – 2.25% – Supers 1.50% – Other 0.75% • Production Support 1.00% • Warranty 0.75% • TOTAL INDIRECTS 4.00%
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Sales & Marketing Expenses
• Sales Salaries & Commissions 2.5-3.0% • Advertising 1.0% • Model Homes 0.7-1.0%
• Other S&M 0.5-1.5% – Research/training – Concessions • TOTAL SALES & MARKETING 6.0-6.5%
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Financing Expense
• Construction Loan Interest • Interest on Sitting Specs • LOC Interest • Other Interest • Points and Loan Fees • TOTAL FINANCE EXPENSE 1.0-2.0%
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General & Admin. Expense
• Management Personnel • Accounting • Professional Fees
• Insurance • Office Expenses • Other G&A • TOTAL G & A EXPENSE 4.0-5.0%
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Other Income/Expenses
• Land appreciation profit • Cash Discounts • Rebates • Interest income • Expenses related to land deals that fallout • The wife’s Jaguar, the plane, the hunting ranch expenses, the luxury box at your alma mater’s football games, etc.
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Net Profit Calculations
• Operational Net Profit 10% – Plus(Less) Other Income = • Exclude Entrepreneur's Exp from Profit Split – Assign to partner’s/owner’s dist calculation • Net Profit before Taxes & Distributions – (Less) Distributions & profit splits = $? • Taxable Income = $?
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Key Balance Sheet Ratios
• Current ratio: (current assets/current liabilities) – 1.3 benchmark • Debt to equity ratio (total liability/total equity) – 3.0- Historical banking benchmark
• Inventory Turnover ratio – (Total Direct Costs/Average WIP inventory) – How to calculate ratios with income statement involvement – What is your benchmark
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HR Benchmarks
• Productivity Ratio $1.25-$1.5M • Turnover Ratio 10% • Revenue per Superintendent $4.0-$5.0M • Supt. Salaries as a % of Sales 1.5% • Training Expenses of base salaries 0.5%
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Contact Information
Bob Whitten
SMA Consulting Orlando, FL /Huntsville, AL 407/447-5209 x 1010 [email protected]
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