Volume home building, it now seems, is not one, but two businesses–related, but separate and very nearly diametrically opposed to one another. One models itself around high, smartly growing unit volume and expanding geography; the other seems to orbit around an adrenaline rush to jettison as much as possible of the assembled empire as quickly as possible. Clearly, 2008 and perhaps well beyond call for volume home building's "other" type of company to emerge and nimbly dodge an onslaught of crippling and potentially fatal injuries and capture hardly visible caches of dollars when and if they crop up. Only 20-something months ago, revenue and price appreciation-laced profits covered up multitudes of big home builders' sins like a thick layer of fresh paint.

Today, those sins–of commission and omission alike–seem to be a lot of what there's left to see among a business class of companies that were so proud to enter the ranks of the Fortune 100 elite in their recent heyday.

As home builders' strategies shift from growth to survival to positioning for future growth, and as operations shrink from armies to S.W.A.T. teams, it falls to companies' chiefs of finance to make sure the dollars make sense, whether they're going out or coming in.

Where variances may have been the rule during quarter after quarter of record growth through 2006, there's now zero tolerance for cost overages, revenue misses, timing errors, or surprises of any kind up and down management's decision chain. As deal and capital access structures that formerly assumed a quick pace to completion–and virtual certainty about one's capacity to meet payment obligations in a timely manner–start to fall into non-performing territory, financial, regulatory, and even legal woes imperil enterprises that don't aggressively address and attempt to renegotiate better, much more patient terms. As volume shrinks and as many commodities prices get more expensive, margin pressure intensifies and financial discipline steps into the spotlight.

Plus, as it turns out, a benefit of doing so poorly after having done so well such a short time ago is that Uncle Sam may be willing to give back some cash on taxes paid against assets that have lost value–but only if the accounting is handled properly.

No sooner had the nation's volume builders begun to achieve proficiency and distinction as multi-billion-dollar enterprises than they were forced to retransform themselves into two-thirds or half of their former selves, and on the financial frontline are those companies' CFOs.

"You need to be proactive, not reactive, whenever possible," says Joel Rassman, chief financial officer at Toll Brothers. "I don't know if you can ever be properly prepared for anything. I think you can try to anticipate what can go wrong and protect yourself from those things that can go wrong. You can only know with hindsight whether you did it properly or not."

On the following few pages, we put some of chief financial officers' biggest challenges of the moment out on the table and ask some of your colleagues to offer their perspective on where the risks are greatest–and where the opportunities may be hiding as the battle for the bottom line goes on. It's like a sneak preview of hindsight.

Audit Patrol

Phil Creek, M/I Homes
Tenure as CFO: 14 years

The Top Line

Not long ago, balance sheet focus was on revenue growth and profitability. But as the brutalities of home building's cyclicality continue to play out, net operating losses rob the limelight–shifting tax implications in the process. Whether it's booking charges against tax allowances or capturing revenue that can be clawed back against past profits, CFOs' mastery of tax accounting and regulation is getting a full-contact workout.

One for the books

With more than 30 years in home building finance, Philip Creek, senior vice president and CFO of M/I Homes, places the company's business strategy front and center while crafting a capital structure that he describes as conservative and simplistic. After five years in public accounting, Creek spent 15 years with The Ryland Group. During that time, he maneuvered the company through the challenges of Texas in the early '80s and California in the early '90s. With great perspective on housing's cycles, he joined M/I in 1993 and has been able to parlay his experiences into a solid position among publics, in spite of the particular afflictions that precipitated a Midwest slowdown far in advance of the national correction.

Balance Seet Tactics

While Lennar's high-profile, multi-state fiscal year-end land sale focused attention and admiration on the potential "free money" available when a loss on a land sale is applied against profits reserved in the prior 24-month period, the Florida-based builder was hardly alone in its efforts to capture a cash upside. Industry experts, brokers, and dealmakers were all consumed in a flurry of activity prior to Dec. 31 as publics and privates alike scrambled to offload non-performing assets in favor of revenue generation against 2005's record earnings.

Although the total number of closed transactions fell short of what many anticipated, builders still benefited from the claw back–among them M/I Homes, which sold off 3,700 lots, mostly in Florida, and announced its exit from the West Palm Beach market. In a sale totaling $82 million, the company expects to record pre-tax land impairment charges of approximately $80 million in the fourth quarter of 2007. However, by closing the deals on Dec. 27, M/I will benefit from a sizeable cash infusion in the form of a tax refund.

"We paid about $50 million in taxes in 2005 and a similar number in 2006," says Creek. "With the transaction we announced at the end of the year and the other land we sold during the year, we [estimate] we'll get that entire '05 amount back in the second quarter of '08. No one likes selling assets for losses. But we think that continues to position us for challenging times, and we think '08 will continue to be difficult."

Despite the hit, Creek says it's crucial to stay flexible and constantly evaluate the economic environment, adjusting to the short term and planning for the long term. "Every company is a little different and needs to look at what's best for you," he notes. "We think Chicago will be a good long-term market for us, and that's another reason to sell some assets, primarily in Florida. We need to look at where the funding needs in the business will be and where the long-term benefit will yield the most."

With exceptional industry profitability–and high tax payments–posted for 2006, it's likely that more claw back motivated sales will continue as this year progresses. At the same time, the tactical skill set of Creek's CFO peers faces challenge on another front: the issue of tax-deferred assets, which hit the industry's radar in December when K. Hovnanian booked a $216 million reserve against deferred tax assets.

Hovnanian found itself in good company just weeks later as KB Home reported its earnings and booked a $514.2 million tax valuation allowance.

"When you look at the business economic side of it, assuming you make money in the next 20 years, you can still get that deferred tax asset recovered; you're not writing it off, you are just reserving it," says Creek. "In the short term, it's bad news because you have to reserve a fairly big number, and that may lead to kicking a bank covenant. It adds to the fatigue. It's just another apple on the apple cart for home builders and banks to deal with."

When a company takes a loss, it avoids taxable profits. But can "bank" tax deductions and credits offset the future tax bills a company will incur once it becomes profitable again? If a company goes an extended period without paying taxes, allocations set aside can expire. Looking at historical loss and projected financials, FAS 109 requires that a company write down the value of its deferred tax assets if a distant-versus-near-term return to profitability seems "more likely than not."

As if the decisions weren't subjective enough based on a company's past losses and expected future performance, add in the additional nuances inflicted as each accounting firm applies its own interpretation of how to comply with FAS 109.

According to The Ryland Group CFO Gordon Milne, "It's a bigger issue for people who had bigger impairments." It's no surprise that industry watchers are waiting to see the reaction of companies like Centex, D.R Horton, and Pulte–all builders with hundreds of millions of dollars in deferred tax assets on their balance sheets.

As we sit on the verge of many public companies' financial reporting, experts say it's nearly impossible to predict which companies will have to take write downs and how much will be required.

–Lisa Marquis Jacksonmoney