Critical Management: The Data Homebuilding Executives Need to Track (Part 1 of 3)
We examine the reports every homebuilding executive should track
From local job data and MLS listings to traffic conversion rates and production costs, information is critical to the management teams of the nation's largest home builders. Whether it's a standard balance sheet produced by a financial software package or a customized chart generated in Microsoft Excel or Access, the reports and data that home builders create and analyze can often help steer the direction of a company.
Industry experts say that knowing just when and what data to look at and how to analyze it is critical in sustaining operations. In this three-part series, Housing Giants explores the data and reports that help upper management, sales managers and production managers measure performance and productivity. First, we tackle what should be on upper management's minds.
With housing prices dramatically falling from their peaks in 2005 and 2006, many home builders are taking a second look at data and their reporting methods. Colorado-based home building consultant Chuck Shinn of Shinn Consulting says that the housing bubble overextended itself because many home builders simply didn't watch the economic data and reports around them. Key indicators, he says, surfaced between 2000 and 2007, when the cost of housing grew sharply but most wages remained stagnant. During the beginning of that period, the median price of a home was $139,000, but by June 2007, prices peaked at a whopping $229,200. And although home prices had risen 64.8 percent during that time, median incomes had only risen 16.6 percent from $50,732 to $59,157.
"I think you should have this [economic] information and data constantly posted in the war room," says Shinn. "Everybody should have seen the bubble on pricing and there was actually no economic base whatsoever for what we were doing."
Builders must still look at their own internal data, too. A company's financial ratios can reveal a lot about how to trim operations, produce more cost-effective products or decide whether to hold or sell a parcel of land during the downturn. Along with the financial data, Steven Mungo, CEO of the Mungo Co., says that because sales drive home builders, it is one of the most important things that a CEO or president can track. Mungo constantly sifts through sales reports and regularly observes referrals, weekly sales and weekly cancellations. In a downturn, Mungo says builders will likely pay more attention to reports and data than they did in the past. "[Reports] are more important than they used to be, and that is because everyone has much greater financial constraints on them than they did before. It used to be you could make up your mistakes with excess credit," says Mungo.
It is also critical that sales, production, financial and economic data not just be tracked but properly placed against previous numbers so that builders can spot trends. Brett Gardner is chief operating officer of Darling Homes, a Houston-based builder that is projected to finish 600 units and earn $225 million in 2008. Gardner sees internal reports as critical in steering Darling, and he starts by monitoring weekly sales reports that show traffic, conversion rates and sales units results. On a monthly basis, Gardner monitors the profit and loss performance for each individual community and then measures regional performance. He says they monitor that against an annual budget as well as financial metrics at department levels that gauge performance and productivity.
"Beyond the financial performance, we do have job-level gross performance metrics. At the time of sale, we identify the margins expected from that particular job and then we monitor that performance against expected margins," says Gardner.
Mason Cave, chief financial officer of MAC Homes (formerly known as Santa Anna Homes) in Phoenix, runs a large forecasting model that takes into account all of the company's subdivisions. Every month, as the accounting department finishes with its financials, that data is rolled into the system and updates forecasts of everything from sales to cash flows and profit and loss metrics. Cave says the accurate and updated forecasting reports allow him to drive the company in the appropriate direction. He also credits the company's constant analysis of data and reports to helping it survive the downturn. What Cave saw in the reports allowed MAC Homes to adjust prices faster, determine what projects they could cut loose and approach their lenders.
"[Tracking the data] allowed us to understand what was coming down the pipeline. We were able to get in and talk to our banks sooner. We were able to react sooner based upon understanding the financial metrics," says Cave.
From an upper management's perspective, it can be hard to track every minute detail of a company's operations. At many organizations, these reports are compiled from the individual departments and from external sources, then channeled into executive summaries that give overall insight without getting bogged down on too many details. Craig Thomas, vice president of development and construction for Epcon Communities, looks at daily and weekly reports along with a monthly "flash report." That key monthly report is printed on one legal sized paper and, through graphs and color codes, shows in each community what is under contract, what is under construction and the costs and other financial information.
"I can see which communities are lagging, which are hitting the target, and it breaks down financial information by cost code summaries. It gives me a colorful and graphical depiction where I can see it all in one place," says Thomas.
At Epcon, production reports are generated by superintendents at each site who send it in to a central clerical administrator who consolidates the information, reviews it with the director of construction, then updates it on the company's server. The sales department generates its own reports that go through the same process before being injected into the system. The data is organized and compiled between Friday and Monday, and on Wednesday it is used in a weekly team meeting that involves everyone from construction superintendents to purchasing managers and sales staff.
"We have a lot of different disciplines represented around the table so that we can talk about the activity in a particular community. We manage [to those reports] and work very hard to stay within our budget so that next time we do a project, we can learn from it," says Thomas.
At Darling, the financial reports come from the accounting department and are overseen by the CFO who directs a staff of sixteen. Other corporate metrics reports are generated and picked through the IBM AS/400 back-office system. An automated, Internet-based network shared by sales staff, production and upper management allows everyone to stay up-to-date with contracts and customers. External data is also collected from a land department in each city that compiles a monthly report and presentation for the state of their market.
"We gather data from a lot of different places and we use some of the canned reports from the system and also take that data and make reports from other software packages like Excel and Access," Gardner says.
While many reports can be quickly populated from the data in accounting systems and economic reports, other miscellaneous pieces of information can't be put into numerical format. At MAC Homes, Cave says that local business or economic events — such as the arrival of a major employer to the market or a passing of local tax incentives — can provide critical information in understanding the direction of the housing market. That type of data is often informally aggregated into regular e-mails or executive summaries.
"We have a team deal where everyone is just searching for the news that is pertinent. We'll usually just pass that around through the management team. You'll see the articles being sent through the mail system, and they just hit everyone's desk," Cave says.
In today's market, many builders are faced with the tough decision of selling off their land at a loss or holding on for a market uptick. Doug Wilson, a consultant with Next Solutions, says that home builders should take a close look at their balance sheets, financial ratios and local markets to determine the best way to handle their losses. To keep the organization in place and ready for the upturn, Wilson says that sometimes means purging overpriced land from the balance sheet. Often, the best way to sell lots is to build them out, even if that means taking a loss.
"Don't be afraid to build for no or low profit on your homes. Purging your balance sheet may be more important than your gross margin right now. The key mantra now isn't to make money, it's to survive," says Wilson.
Glenn Gleason, senior vice president of process excellence at Dewey Homes in Pennsylvania, says that home builders should be paying close attention to their return on invested capital. Watching overall profit margins and returns per region, per community and per employee can help home builders isolate areas for improvement and increased productivity. With itemization of the ROIC, trending and analysis on a regular basis, home builders can identify small, incremental improvements that can have big cumulative effects on the balance sheet.
"You have to look at the data on a month-by-month basis because you have to see trends and patterns to see what is happening. You always need to know where you are with a cash and sales standpoint," says Gleason.
Don Wick, executive vice president of Rockford Homes in central Ohio, says that it is essential for upper management to take a general overview of the entire picture by observing sales, production and how each house or community affects the company's balance sheet. Wick tracks overhead ratios, model costs per sales volume, sales prices and how that relates to marketing efforts. He also tracks everything throughout a home's cycle on a 60-line item cost report. Although tracking of the data is important, Wick notes it is critical to look for trends and projections.
"The projection of the data is so important as to what you are going to do with your inventory; how you are going to develop it; change your zonings or uses, where the new markets are going to be; and even the future of your own staffing," says Wick.
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