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My client, Former Marine, Zack Williams wants to understand how a decelerating market effects the trade's cash flow so that he can improve his competitive positioning by becoming the builder of choice as the housing market corrects.
At this point, many people in the industry have come to accept that we are experiencing a zig or a zag in the housing market. Across the country home builders are cottoning on to what this means for their business. But they are slower to recognize the opportunities presented by the market change. If their focus is too inward, they are likely to miss seeing how a slowdown effects the other parties in the industry, and where they can gain a competitive advantage.
Let me tell you a little story.
There was a home builder I once worked with. Will call him “Zack Williams” to protect the guilty. He worked across the Southeast at various public and large regional builders. A former Marine, Zack had salt and pepper hair and a bushy mustache. He had a deep, commanding voice. His expertise was leadership and strategy. He did not know a lot about the building cycle but he did know a lot about getting groups of people to get it done. Zack was good at taking feedback and good at self-analysis. He was a consensus leader which is good at times but not so good at other times.
As a former Marine, you think he would have been a tough ass all the time but he wasn’t – sometimes to his detriment, as he had a big heart. Zack was also a great poker player and a superior athlete in his younger days. He loved to share his story about THE glory catch in a famous Army- Navy Game, way back when, certainly one of those sweet moments in his life that I felt honored he shared with me.
One day I went into his office to discuss a problem he was having with the trades.
“Noelle! Welcome back,” he said. “Good to see you.”
“Good to see you Zach,” I said. “What seems to be the problem? Let's get er done. Daylight is burning.”
“The trouble is some of my trades are refusing to work until we pay them, ” he said. “Our terms are Net 30. To preserve cash, I ordered accounts payable to stretch that out to Net 45 and in some cases Net 60, but we always eventually pay. Why are they acting so wacked out and treating us like this?”
“Well Zach,” I said. “In a time like this you need to understand the externalities and how they influence your local home builder market. Externalities like the political economy, the social dynamics, cash flow among your peers, and even the political climate, plus you know the trade base talk to each like an afternoon soap opera. All those external things that are going on around you and effect your performance as a company.”
“Let’s break it down, Barney-style Noelle,” Zach said.”
“Ok Zach,” I said. “Did you know the biggest public builder in this market just changed their payment terms from Net 30 to Net 90?”
“Good initiative, bad judgment.” he replied. “The trades must be upset.”
“They are in a total panic,” I said. “And who can blame them? All of the sudden they are having major cash flow issues and they are scared if anyone goes under they will go with them.”
“Thanks to your good advice, we are not in any danger of that,” he said. “We diversified our capital stack and secured some new sources of equity as well as new lines of credit. We are under pricing the competition. Making sure we create equity for the buyers. They shouldn’t be worried. I am not, this is bump in the road! That's all!”
“They shouldn’t be, but they are only human,” I said. “But you can use your financial strength to help them and help yourself by becoming the builder of choice. What I would recommend is to shorten the cycle and pay the Trade’s every two weeks in rotating cycles. Instead of paying Net 30 or later, divide them up into two groups - an A group and a B group. The A group gets paid on the first and third Friday of the month. The B group gets paid on the second and fourth Friday.”
“Can we do that?” he asked.
“It is going to be a little hard at first, but your back office can handle it,” I said. “This was one of the advantages of getting your house in order before the deceleration started. Once you go to that payment plan, what are the trades going to do?”
“Well if I were them I would prioritize our work over anyone who was paying them out longer,” Zach said convincing himself. “If we become the builder of choice and cut our cycle time we can undersell the competition by even more than we are today.”
“I have seen it work before,” I said. “If you can manage your cash flow you can gain market share and maybe, just maybe emerge as the number one builder in this market.’
“Sweet! I like that idea.” he said.
With my help, Zach was able to arrange to pay his trades every two weeks instead of every month or longer. As I predicted he became the builder of choice. As he predicted, his company was able to cut cycle time and under price the market.
The moral of all this is dark clouds can have silver linings and sometimes even real silver! That is my story, and I am sticking to it.
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 are a home builder and concerned about your results - you can do better! If you want to find out more, 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 three questions when you call are usually:
1) How many units do you sell per year?
2) What is your average sale price range?
3) What is your projected net income for the current year?
https://www.linkedin.com/in/noelle-tarabulski/
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