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 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

• 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 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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