Preparing for a panel discussion at the Housing Leadership Conference, Big Builder’s Sarah Yaussi blogged about the differences in absorption rates between legacy and newer vintage communities, asking the question of builders, “How would selling one more home a month in every community change your business?”, and then using that question to underscore what she sees as a critical need for builders to increase their mix of new communities.
Arguably, everything important – or at least, actionable – that happens in homebuilding occurs at the community level, because enterprise performance is largely a roll-up of community performance. Communities are where new homes are sold and built, where they are merchandised, where the vast majority of every category of resource is allocated and expended, where Throughput is generated.
The community level is where margin meets velocity.
So, the decision on community mix invariably, insistently leads to the perspective of community contribution. Contribution in the financial-sense of the term. For all meaningful intent and purpose, Contribution, Throughput, and Gross Income are synonymous terms. Faced with the need to optimize the allocation of finite capital and capacity, some picture of Community Contribution has to emerge. In the constraint-management world, choices invariably have to be made about the most productive use of limited resources.
We just started a new, long-term engagement with a long-standing, respected client, using what we term a results-based approach to building an effective client-consultant partnership: A series of consecutive projects, with short durations, targeted and measurable results, achieved rapidly; singular-focus on the constraint; team-based performance compensation based on achieving milestones related to a single, important business outcome.
The engagement started with a blunt assessment of current reality. The current and foreseeable external parameters – the economy, the housing market, the future of housing finance, etc. The current state of internal capability and capacity. A more-or-less classic SWOT analysis.
And, what was our resulting, recommended, very first order of business?
– Breakeven Analysis on every active community, based on a Contribution Income Statement. More specifically, an analysis of the breakeven margin with the current plan portfolio at current sales, an analysis of the breakeven margin at significantly lower sales prices, and an analysis of the breakeven sales/prices at the lower prices and margins required to significantly boost traffic, conversion, and sales.
– The shelving of communities deemed unviable, or even insufficiently viable, under the current situation.
– The reallocation of scarce, down-sized teammate resources, and valuable, constrained financial resources, based on the relative ability of each remaining community to generate Throughput.
– Finally, aggressive new sales targets, supported by reductions in sales prices and margins – but otherwise achievable only through extraordinary selling efforts – set in advance of any demonstrated improvements in either the margin or the velocity required to drive the team-based performance compensation plan. In other words, a commitment to lower prices, in advance of any realized capability to make more money on every house they sell, and in advance of any demonstrated capability to build more houses with the same amount of inventory and production capacity.
So that, without subsequent improvement in both margin and productivity, the financial performance of the company would be negatively affected.
Having invested most of his personal fortune to equip his expedition, Hernan Cortes’ set sail from Cuba to Mexico in 1519. When he arrived in Vera Cruz, he scuttled his fleet, so that there would be no turning back..
I told them, “It is time for Cortes'”.