Home builder finance

Despite a robust market for new housing, a quarter of all homebuilders are operating on razor-thin profit margins. According to a new book from the National Association of Home Builders, "The Business of Building: Measuring Your Success," the poorest performing 25% of builders earn net profits of less than 0.5% before taxes, compared to the nationwide average of 6.35%.

"The Business of Building" presents the results of a four-month research effort on the business practices of more than 300 builders nationwide. Even "average" builders don't perform as well as they should, according to industry experts. "Building companies should earn about 8 to 15% net profit margins," said Emma Shinn, a financial consultant with the Lee Evans Group, a Colorado firm that helps home building companies improve their business operations. Shinn, a member of the NAHB committee that sponsored the new research, noted that the best performing 25% of the builders participating in the NAHB study generate average before-tax net profits of 10.47%.

In addition to surveying builders on profitability, NAHB also studied such important financial indicators as owner compensation, cost of sales, expenses, asset-to-liability ratios, inventory turnover, and debt-to-equity ratios. Understanding those measures can mean the difference between business success and failure.

"The highest-performing builders know their financials," said Allan Freedman, executive director of NAHB's business management department. "They know how to read them, and they use them to make decisions based on the knowledge their financials contain. The Business of Building is a great resource for builders who want to understand their numbers and how they compare to other builders."

To make that comparison easier, the book breaks out survey findings into three categories of building companies: small volume (building fewer than 25 homes per year), production (more than 25 homes per year), and custom (any number of one-of-a-kind-homes). "The Business of Building" also includes a CD containing a spreadsheet into which builders can type their own financial figures. The spreadsheet then automatically generates a report comparing their results with the survey data.

"That kind of benchmarking is critical," said Freedman. "By understanding how well or poorly other builders perform financially, you can compare yourself to them and gain a better understanding of just how well your company is doing."

"The Business of Building" also includes 50 pages of advice from leading building industry financial advisors on how to use the book to improve financial performance.