By Noelle Tarabulski, Founder, Builder Consulting Group

By my count, there are over 150 ways to improve a home builder’s profit. This is just one.

As home builders we want to follow accounting and industry best budgeting practices so that we don’t end up with a loss at the end of the year AKA the empty shoe box. URGENCY MATTERS in our line of work.

Budgeting is a pain and always seems to get in the way, until it doesn't. It is an accounting practice that gets a lot of builders sideways, no matter their production volume, when they and their team are NOT on the same page. Over the years there have been a number of accounting and construction industry standards for budgeting established to help builders make better business decisions. To that end, if home builders are disciplined enough to actually follow them, budgeting would save them a lot of grief at the end of the year.

Let me tell you a little story.

One of my clients, who I will call “Frank” to protect the guilty, was a tall guy with a stately presence. Many big guys are good natured, and Frank was in the that group. Frank was very competitive, and pensive at times. He played a little round ball in college and was not at all afraid to mix it up under the net. Afterwards he went to law school. It took a lot to make him upset, sometimes he would let the details slide a little too much. This casual nature could be a liability in the office. Truth be told, some of the people who worked with him were a little afraid of telling him the truth, he was firm when he needed to be, but always listened if there were issues. One December he called me to his office in despair, the results he had expected were not showing up in his bank account.

“Noelle,” he said looking down at his desk. Eyes hidden. “I do not understand it. I worked REALLY hard this year. We delivered some great homes. I expected to have half a million to a million dollars in my bank account by now. I cannot figure it out. Where did the money go? Is someone stealing from me? I am going to kill any son-of-a-bitch who steals a million dollars of my money.”

“Frank,” I said in an understanding but concerned way. The only way to figure it out is to go through your financials and see. I hope you do not have the empty shoe box disease. ”

Just as I expected, his budgeting was a real mess. For that reason, I set out on my mission to collect and assemble all the payments he made. For the next three days I sat in the office allocating them into the right buckets according to industry practice. When I finished, the picture was much clearer. I went back into his office with the bad news. Literally his overhead (and interest carry) chewed up his gross margins because his deliveries were off by 40% - ouch!

“Well Frank,” I said holding the corrected pro forma in my hand. “I have some good news and some bad news. The good news is, no one is stealing from you - but here is the bad news.” I handed him the updated pro forma with the expenses in the accurate budget categories because I did not want to say it out loud. I thought he was going to blow a gasket. The net showed...

“Zero? Zero!?”, he said with mounting disbelief. “I did not make any profit this year?”

“Pretty much,” I said as he stared at me with open mouthed wonderment. What the %*^^&?

After a long pause, he finally put his head in his hands and stared at the top of his desk and said, “I can’t believe it. I did all this work this year for free. I am exhausted. I have 3 kids teed up for college! ”

Although he had no one to blame but himself, things where not quite as bad as they seemed. Frank had paid himself a salary throughout the year, so he was not destitute. The reason his home building business was barely profitable was because of poor budgeting and understanding the impact of high overhead relative to the timing of home deliveries. At the beginning of the year, Frank had allocated his costs among 10 luxury homes he expected to build and deliver. In the end, he only finished 6, but he never revised his overhead and it ended up eating all his profit. Sadly to add insult to injury, his banker and equity partners made more money them him. He being the true operating RISK Taker made ME very bummed out for him. 

When it became apparent Frank was not going to execute according to his plan, he should have driven the schedule harder. But he did not know the consequences of delay because of his poor accounting. That is how it goes when you don’t have your budgets in place and accounted for in the right buckets. Fortunately, he had 4 more homes scheduled to close in February and March, but that did not help his current year results. 

With lessons learned and by starting the year with better budgeting, Frank could expect the new year to be much more profitable than the old. His banker was not pleased but the damage was done and he could only improve from the lesson learned.

The moral of all this is don’t end up with the empty shoe box at year end. If that is the case in 2019, make sure you get it right for 2020. That is my story, and I am sticking to it.

I can be reached at noellet@buildertools.com 

Home builders and developers are the backbone of this country. They work hard, take risks, and create more wealth for society than any other sector of the economy. If you need some coaching on how to make 2019 a great year, call me at 303.525.4944 or email me at noellet@buildertools.com and LinkedIn is a great place to find out more about my credentials, background, and references.

My first four questions when you call are usually:

1) Do you have an immediate operating challenge?

2) How many units do you sell per year?

3) What is your average sales price range?

4) What is your projected net income for the current year?

https://www.linkedin.com/in/noelle-tarabulski/