Money Ball: Understanding the Numbers of Homebuilding February 2012 Presented by: Bob Whitten Financial Model Where Are You Now? Financial Model Where Are You Now? 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” Where Are You Now? 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 Where Are You Now? 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! Where Are You Now? 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. Where Are You Now? 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 Where Are You Now? Indirect Construction Expense • Field Expenses – 2.25% – Supers 1.50% – Other 0.75% • Production Support 1.00% • Warranty 0.75% • TOTAL INDIRECTS 4.00% Where Are You Now? 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% Where Are You Now? Financing Expense • Construction Loan Interest • Interest on Sitting Specs • LOC Interest • Other Interest • Points and Loan Fees • TOTAL FINANCE EXPENSE 1.0-2.0% Where Are You Now? General & Admin. Expense • Management Personnel • Accounting • Professional Fees • Insurance • Office Expenses • Other G&A • TOTAL G & A EXPENSE 4.0-5.0% Where Are You Now? 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. Where Are You Now? 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 = $? Where Are You Now? 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 Where Are You Now? 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% Where Are You Now? Contact Information Bob Whitten SMA Consulting Orlando, FL /Huntsville, AL 407/447-5209 x 1010 [email protected] Where Are You Now? .