What do home building's leading indicators actually indicate? If you heed financial news reports, "gloom and doom" intensifies with each day. In our travels, we see builders choking on specs and excess land inventory as overheads balloon and cash flow slows to a trickle. As you look honestly at your overhead, debt obligation, and cash reserves, what's your plan to survive? If there's ever a time to have a long-term strategic plan, it's now. To survive in what will be an extended downturn and slow recovery, you must look forward, be predictive, and keep focus on the long-haul.
Drop The Volume
As builders use whopping discounts to catalyze sales and short-term cash flow, many homes are selling at or below cost. Fact is, volume is no key to the future. Profitability comes from reduced overhead (doing more with less), efficient processes, and shorter build times. As markets tighten, margins and sales erode. During the past 48 months, revenue strength hid operational efficiency weaknesses. The basics of profitability are not new, exciting, or easy.
As you devise a plan, leverage your strengths, plan for the worst, and don't run on optimism. A conservative approach to increase efficiency, cash flow, and profitability is a good first step. But, as with every good strategic plan, it must match your projected sales. When you project sales and closings, don't be optimistic. Resist the temptation to project your sales based on what you need. Rather, project your closings 12 months out based on your last three months of sales.
Ask questions like: What changes are occurring in the industry and within your market? What is beyond your control that affects your business and profitability? What do you expect your competitors to do, and how will you react? Always consider a worst-case scenario and work forward from there. Adopt a strategy that doesn't rely on wishful thinking. If your plan doesn't keep your company profitable long-term against a worst-case scenario, start over. Come up with a plan that will.
An outside expert can bring a fresh perspective to your processes and help you rethink approaches to improve profitability. What worked when business was good may hinder your ability to become efficient today. If you find yourself making decisions because "it has always worked that way before," then trouble is near. Amid today's market turmoil, it may not work any more. Rethink your way of doing business and develop a new approach for the new marketplace.
To be a survivor in any extended industry downturn, you must know your company's strength and weaknesses and develop a long-term plan that will work for you. For those of you who have "been there and done that," your experience will give you an advantage over those who have never gone through it. Take time now to evaluate your market and business opportunities and anticipate what your market will be like and how you can manage through it. Don't use up your cash in a vigil awaiting a turnaround. Use your resources to be the next generation builder.
–Richard Hawkes, former CEO of Holiday Builders, currently heads his own consultancy. E-mail: email@example.com.