Money Ball: Understanding the Numbers of Homebuilding February 2012 Presented by: Bob Whitten
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Money Ball: Understanding the Numbers of Homebuilding
February 2012
Presented by:
Bob Whitten
Where Are You Now?
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%
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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
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