Compare your company to the best
ost builders may be familiar with the process of bench- anticipate a required change in direction for weak areas and marking and know that it involves comparing a certain increase focus on strong areas. set of results to prior years, industry averages or other ‘Average’ vs. ‘Best in class’ criteria. Simply comparing your company to prior years or industry What you may not know is how important benchmarking can “averages” will not get you where you need to go. be to running your business profitably, and how you can use it Your company might have performed poorly in prior years, most effectively. and simply equaling what everyone else has done may not help Benchmarking is good business you make more money. If you want to improve your company’s financial performance, Contractors who regularly benchmark their companies’ financial performance and other operating metrics against averages for compare its results to the best-in-class measurements for your their specific trade, niche, company size, type of work or region specialty, and then you will have a goal worth achieving. Best in class is often the top 25 percent most profitable firms in know the value to be gained from learning how well they compare any particular classification. If to their competitors. Becoming “best in class” in any business or specialty often you can meet or beat those stats, hinges on having objective data on “where you are” among your you will know you are on the right competitors, what your performance strengths and weaknesses track. If your benchmarking statistics are, and what trends are taking place within your industry and the do not measure up to best-in-class industries that directly impact your business or specialty. standards, then you can set strate- ➜ NAR report: New home Benchmark ing gic goals to address those specific is the way to gather sales expected to double metrics. that data and apply in 2013 it to your company. Where to begin So where do you go for best in Benchmark ing ➜ Six key components of a comparisons help class measurements for your builder’s budget quantify perfor- specialty? A number of general contractors mance in specific areas and allow and subcontractors belong to owners and leader- national trade associations that ship teams to calculate and publish annual forecast trends, benchmarking results for their
See Benchmarking inside
An information bulletin to contractors from:
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NAR report: New home sales expected to double in 2013
ew housing inventory is at a 50-year low, but new home sales are up 20 percent nationwide and could nearly double last year’s sales, according to the latest economic forecast by the National Association of Realtors. New home sales are proew home sales jected to surpass 630,000 are projected to nationwide in 2013, compared to 300,000 in 2011 and surpass 630,000 390,000 in 2012. During the nationwide in 2013, peak bubble year of 2005, compared to 300,000 in new sales hit 1.2 million. Existing home sales have 2011 and 390,000 in 2012. risen about 10 percent, according to the August 2012 NAR report, with 4.6 million in sales projected for 2012 and 5 million for 2013. Shadow inventory – distressed properties not yet on the market – is over 3 million homes, but there are 1 million fewer distressed properties than a year ago.
As available inventory has begun to decline, the NAR report said one issue that may hold back some new construction is the difficulty many small home builders may have getting construction loans. The price of homes nationwide has begun to stabilize and is increasing at the national level, the report said. Nationally, prices are expected to rise 4 percent in 2012, and by 5 percent in 2013, with some markets, such as Phoenix, rising as much as 10-15 percent. For 2012, the median home price across the nation is $173,000, with the forecast for 2013 at $182,000. ❚
Benchmarking continued from page 1 members and typically make them available when those members share their companies’ financial results with them. CFMA (Construction Financial Management Association) has been doing the same thing for decades for the entire construction community in America, breaking down the results by contractor size, geographic region and trade. CFMA publishes its results annually in its Construction Industry Annual Financial Survey available via the Internet. Most sureties maintain an extensive database that includes ost sureties every company they underwrite, maintain an categorized by contractor size, region, trade and more. extensive Your surety should be glad to database that includes share with you how your compaevery company they ny stacks up against others like underwrite, categorized yours in their database. Other organizations, such as by contractor size, CPA firms, perform contractor region, trade and more. surveys of specific local regions. Their contractor clients frequently ask them, “How’s everybody else doing?” So rather than just giving you a shoot-from-the-hip answer about what they have seen, or national or regional data, these professionals produce financial surveys of local contractors. Some contractors find this type of benchmarking data to be more useful in gauging how contractors are performing in just their region. You may want to try to find someone in your region who does this and take advantage of that opportunity.
Key benchmarks and ratios
What are some of the benchmarks contractors should be tracking? In addition to looking at net income and whether or not you made money, key financial ratios include gross profit, operating income, working capital, debt-to-equity, backlog,
underbillings to overbillings, and profit gain or fade from open to closed jobs. Profit gain or fade on jobs may be the most critical area to examine and understand, especially if your closed jobs regularly show significant fade from what you expected to make. Ideally, your final profit ratio on closed jobs should equal or exceed the estimated profit ratios while the jobs were in progress. Best-in-class contractors routinely show more gross profit on closed jobs than the original estimates when those jobs began. If yours do not, you need to analyze your jobs by the type of work you are doing, contract size, geographic region, estimator, project manager, owner, general and any other factor that may consistently cause you to lose money. Also, employee turnover, equipment utilization and overall workload can impact job profitability. Once you begin benchmarking, you’ll have the data you need to consistently and objectively analyze your company’s performance and set solid, quantifiable goals. Observe key ratios, be proactive and you will be well on your way to becoming “best in class” yourself! – Dan Owens, CPA, MBA, CCIFP, CPAmerica affiliate VonLehman + Company Inc. ❚
Nov./Dec. 2012 Building For Success
Six key components of a builder’s budget O
ne of the topics that contractors often talk about – but don’t always do – is budgeting. They know how to estimate and run jobs on budget, but often overlook budgeting for the rest of their companies’ operations. The following is an overview of areas any organization may consider as key to its budget. Many owners of small to midsize businesses don’t prepare a budget or update the one they have, typically because they’re too busy or simply aren’t focused on sticking to a budget. Yet, with the economic recovery slow and every dollar precious, business leaders need to know where money is going – both now and in ith the economic the near future. What’s more, external recovery slow stakeholders may look for and every dollar your company to maintain precious, business leaders a sound budget. need to know where Many banks, for money is going – both instance, are setting up now and in the near loan covenants with an increased emphasis on future. budgeting. With that in mind, here are six key components of a complete business budget:
1. A description of your business and its market.
You may think you have a sound budget for your company, but it won’t be accurate if it’s for your company three years ago. Compose a brief description of precisely what you’re doing right now, how your market is performing, and the economic factors that may be affecting how your money is budgeted.
2. Explanation of how the budget supports the company’s business plan, mission, vision, values, goals and objectives. To be included in the budget, items should tie into and support overall company goals. If you can’t effectively demonstrate how an item enables achievement of a particular goal, you should question its merit. If you don’t already have a mission statement, compose one to help you with this component.
3. Line-item details for allocating funds.
The budget format should follow the formatting of company financial statements. Typical examples include staffing, real estate, equipment and material needs. Although it can be tedious to maintain a detailed budget for all company expenditures, it’s good cash flow management. Cash flow management, while related to the budget, is generally a separate topic.
Your budget can facilitate expense tracking and help guide spending decisions to align with your business goals. It’s also important that the basis of your line-item detail budget not be the prior year actual – but rather the expenditures should be calculated, based on current known conditions and assumptions. And, most importantly, assign accountability: The final budget is signed and dated by those approving it.
4. Expectations for measuring performance against the budget. For analysis purposes, a budget is useful only if you update it regularly so it ost importantly, accurately reflects both actual and anticipated assign accountability: spending. The final budget is For instance, you may signed and dated by those have under-budgeted or approving it. over-budgeted on some items and, thus, spent more or less than you expected. For analysis, keep the original and records of all processapproved changes.
5. Supporting appendices. The appendices may include a historical budget and results analysis. Also consider attaching summary documents for each department, tables and graphs depicting market and cost trends, a list of key assumptions used and appropriate organizational charts.
6. A dashboard or executive summary.
A summary or dashboard can be a good way to focus all of the information in your budget and provide you with some practical “takeaway.” More important, a dashboard can make your budget more digestible to lenders and outside investors. – Joe Harper, CPA, and Adam Davey, CPA, CVA, CFE, CPAmerica affiliate VonLehman + Company Inc. ❚
Nov./Dec. 2012 Building For Success
How to break even on rental property Unlike many investments, breaking even on a monthly basis is the immediate goal with rental properties. As long as rental income covers outgo, most investors in these properties are happy. Rental properties are long-term investments, and current income is rarely the goal. Instead, the goal is to find a renter – or renters, depending on the property – who will cover carrying costs while the investor takes advantage of tax breaks, write-offs and appreciation. Then, as mortgage rates stay steady and rental income increases, the investor will realize a positive cash flow. If a property doesn’t break even from the start, you will have to cover the difference between rental income and carrying costs. The break-even point means that the market rental rate covers the mortgage, interest and taxes, plus a 10 percent buffer for vacancies, repairs, maintenance and utility costs. Verify that this will be a sufficient buffer for your property. To maximize the potential to break even, and to minimize vacancy rates, make certain you know market rates, vacancy rates and market demand in your area. For instance, if most of your tenants commute to work, is the property close to public transit? Is it in a good school district? Then purchase the property at a price that will allow you to rent at or just
below prevailing market rates. One way to find the break-even price is the Duct Tape Formula, named because it patches together figures to find a workable number: 1. Take the current rent for the type of property you’re considering (e.g., $1,500). 2. Take the current interest rate (for example, 5.25 percent). 3. Add a factor of one (5.25 + 1 = 6.25), and put two zeros in front of this number (.00625). 4. Divide the number into the prevailing rental rate ($1,500/.00625 = $240,000). So an investment property with a $240,000 sales price should provide a break-even situation. If you put 20 percent down, you are left with $192,000 to finance. The $192,000 at 5.25 percent = $1,060 + $300 for taxes and insurance (check local rates) = $1,360 + 10 percent vacancy/ repair buffer = $1,490. Therefore, there would be a slight positive cash flow ($10) for this property if rented at $1,500. The formula relies on 20 percent down and works for ownermanaged properties only. With more down, you can break even on a higher-priced property. If you don’t manage the property yourself, add 10 to 20 percent for property management fees. ❚
Building For Success
The technical information in this newsletter is necessarily brief. No final conclusion on these topics should be drawn without further review and consultation. Please be advised that, based on current IRS rules and standards, the information contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty assessed by the IRS. © 2012 CPAmerica International
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