By Boyce Thompson. This may seem like an odd time to be writing about business failures. After all, the home building industry continues to roll merrily along, attracting new entrepreneurs daily, generating record profits for many established companies.
But if history is any guide, 14 percent of the construction companies with payrolls doing business today will be out of business at this time next year. That's according to figures from the Small Business Administration, analyzed by the NAHB. The number is well above the 10 percent average for all industries.
The reality is that this is the perfect time to be dissecting the causes of failure in home building. Why? Because this is the perfect time to do something about them: Business is good, but not so good that no one has time to study internal systems. You can use our special report on the topic as a guide. This is the kind of story that you may want to route to key managers in your business.
Our extensive analysis revealed that the causes of failure in this industry are legion. Some builders bet--and lose--the ranch on inflated land. Others build the wrong product in the right place. Still others fall victim to wrong-headed marketing or overly ambitious expansion.
But the leading cause of failure in this business is bad budgeting--not knowing your costs. In many respects, understanding accounting is more important than knowing how to design, build, or sell a house. You can probably find someone to work for you who knows how to do these things. It's much harder to find someone who cares as much as you do about the financial health of your company and can help you identify the right moves to improve it.
Photo: Katherine Lambert
The statistics show that home builders are most likely to fail in their second, third, and fourth years. These are the toughest years for any business, of course, but they are especially rigorous for builders because that's the time builders who came from the construction ranks need to make the transition to managers. Financial shortcomings may become acute.
Even established companies have difficulty tracking costs fully. There's a marvelous anecdote in our cover feature about a $30 million builder who thought he was making $1 million a year. An accounting audit by the Lee Evans Group, based in Littleton, Colo., revealed that he was actually losing $1.5 million. No one accounted for a show home that didn't sell, a half-million-dollar check that was never deducted, and inventory that evaporated.
There are a lot of dangers in the economic woods--inadequate insurance coverage, product defect attorneys, and escalating land prices, to name a few. But if you do become a casualty, it will probably be because of something that you did to yourself. Now's the time to get your house in order.
Editor in Chief