Pipeline Workshops™: Thriving on the Velocity Side of Economic Return®

Homebuilding is an industry that leverages equity with debt, therefore, some version of Return on Assets is the best measure of a homebuilding enterprise’s economic return.  The most useful version of ROA is the DuPont identity, which expands economic return into two components:

Margin (Return on Sales) and Velocity (Asset Turn).

From an operational perspective, the vast majority of assets on a builder’s balance sheet ought to be houses in some stage of construction, particularly when raw land and developed lot inventory is held off-balance sheet;  which means, when we calculate Return on Invested  Assets, we can reasonably associate Asset Turnover (financial term) with Inventory Turn (operating term).

The point is to thrive in this business, not just survive in it.  To do that, a builder has to do well on both the margin side and the velocity side of ROA.  That understanding fundamentally proposes two questions:  (1) How much can I make on every house?  (2) How many houses can I build with a planned, finite, and controlled amount of inventory and production capacity?

As a builder, consider this scenario:  You have a competitor that has exactly the same work-in-process, overhead, working capital requirements, borrowing capacity, and risk profile.

If you generate a Gross Margin of 24% and turn your inventory twice a year, you will be outperformed by this competitor that generates a Gross Margin of only 18%, but turns its inventory four times a year;  you will be outperformed in terms of Revenue, outperformed in terms of closings;  you will be out-performed – better than two-to-one – in terms of Net Income and Return on Assets.

You will struggle to compete;  in fact, you will struggle to survive.

It is the picture of a slow, marginally-productive homebuilding company versus a fast, highly-productive homebuilding company;  your competitor generates 85% higher Revenue and 40% more Gross Income than you do, and does it with the same amount of assets.

It is also a picture of the difference between a 180 day cycle time and a 90 day cycle time, and if that contrast is too stark, then consider this:  your competitor – the one with the 18% Gross Margin and a 4x turn – produces almost the same ROA as you do with a 24% Gross Margin and a 3x turn;  that’s the picture of your competitor’s 90 day cycle time versus your 120 day cycle time.

In the face of clear differences in economic outcomes, remember this:  in this scenario, your competitor is exactly the same size as you, when the real measure of size is the amount of work-in-process you each have to carry.

What creates competitive separation – the distance between competitive position?  It lies in doing the important-yet-difficult things.  The demands of higher productivity are so tough, require so much rigor, so much discipline, so much resolve, that most builders won’t even go there.

It’s not a choice between higher margin or higher velocity;  it’s the challenge – and the opportunity – of producing higher margin and higher velocity.

Pipeline workshops™ are a two-day immersion into the production physics – into the principles and disciplines – that enable homebuilders to thrive on the velocity side of economic return, to thrive on the velocity side of Return on Assets.

Come.  Participate.  Learn.

 

The next Pipeline workshop™ will be held at the Ponte Vedra Inn and Club, Ponte Vedra Beach, Florida, on February 28 – March 1, 2018.  The cost is $895.00 per person;  the cost during early registration, open through December 31, 2017, is $750.00;  for team pricing, inquire here (flgroves@saiconsulting.com).

Sponsored by BUILDER, BuilderMT, and Specitup.

For more details:  www.buildervelocity.com