By BUILDER Magazine Staff. Builders who don't have the benefit of an internal accounting department need to have meaningful financial statements they can use as a management tool and to get financing. Unfortunately, many builders aren't doing it right, say experts.
"In my practice over the years, I've seen balance sheets that were overstated, primarily in real estate construction and progress," says home building accountant Steve Hays. "Builders capitalized interest, overhead expenses, and indirect expenses when they shouldn't have, which inflated earnings. If someone used those statements to provide financing, there could certainly be legal repercussions."
"Builders need to understand their own numbers within their budgets and business plans. But they don't," says Steve Maltzman, of Builder Accounting Services. "Most builders don't have operating budgets or business plans." This leaves them vulnerable to accounting errors that could jeopardize financing or even bankrupt them.
Maltzman thinks having a basic accounting system in place and zealously tracking income and expenses is the simplest way to stay squeaky clean. As running a business gets more complicated, or as the builder grows, the opportunities for errors compound.
Maltzman notes that accounting systems don't have to be expensive or complicated. "It's not the accounting systems that are the problem," Maltzman points out. "Most software works. But builders don't set it up properly, or they are afraid of it. When I talk to builders who are unhappy with their system, I find it's simply that they don't understand the system they have."
Maltzman advises builders to start with two tools. The first is the NAHB's "Builder Business Plan Kit," which will be released early this fall in both CD and paperback versions. This kit includes forms and worksheets to help builders organize their accounting and offers a hypothetical business plan. The kit also advises builders on how to monitor their plans, which, notes Maltzman, is the secret to staying out of accounting trouble (not to mention the key to running a profitable business).
Maltzman's second suggestion is that builders join the NAHB's Builder 20 Club program, a networking opportunity that brings together builders who build in the same volume range to share best practices and improve operations. In these clubs, builders compare financial information and look for trouble spots. Participating builders can also take advantage of a free financial analysis from the NAHB Builder 20 Club accountant firm, Builder Accounting Services.
To learn more about the NAHB's Builder 20 clubs, call 800-368-5242, ext. 8123. To buy a copy of the "Builder Business Plan Kit," go to www.builderbooks.com or call 800-223-2665.