Archive for February, 2022

The majority of SAI Consulting’s work, both in and out of homebuilding, has been about enabling clients to organize and structure themselves around their core-critical business processes;  Business Process Improvement is the area of our practice for which we are most recognized, and we have done more work in this area – and done it longer – than any other consulting firm serving the homebuilding industry.

Why does SAI focuses so much effort on documenting, redesigning, reengineering, improving, and managing business processes?

Because of this basic, fundamental premise of business:  the goal of a business enterprise is to make money;  the way an enterprise makes money is by delivering extraordinary levels of distinctive value to their customers and other stakeholders;  that value is delivered through the work that enterprise performs;  that work must be performed in some manner of workflow;  the most common form of that workflow is work performed in processes.

Make money . . . by delivering value . . . through the work you perform . . . in processes.

From a business standpoint, processes are critically, centrally, important;  processes exist – processes matter – whether homebuilders are intentional about them or not.

We repeatedly make the point that Pipeline workshops™ are about thriving on the velocity side of Return on Assets®, but better process workflow pays dividends on both sides of economic return;  it drives both higher margins and higher velocity, drives higher Return on Sales and higher Asset Turns.

Consider:

Start-to-Completion (the sub-process within the Prospect-to-Closing process that is the aorta of workflow in a homebuilding enterprise) is not, at its core, about process management;  the workflow in Start-to-Completion is multi-project management;  it is project portfolio management, with embedded, supporting, and surrounding processes;  it is also workflow in which all of the non-supervisory work is performed by external resources (trades and suppliers).

Start-to-Completion is not managed like a process, so we have learned not to treat it as a process;  we don’t map it like a process;  we don’t document it as one process;  except for its embedded  and supporting processes, we exclude Start-to-Completion from consideration in business process management.

All of which should make this next point striking – actually startling:  even with the Start-to-Completion workflow excluded, the results from dozens of process mapping engagements SAI has performed, over decades, shows that 25% of all the process work a homebuilding company performs – the work that consumes a building company’s overhead – is completely non-value-adding.

Ponder that revelation for a moment.

Consider its bottom-line:

If your Operating Expense represents – consumes is more to the point – eight percent (8%) of Revenue, it means you are throwing away $20,000 of every $1,000,000 in Revenue you generate.  And, if your true Gross Margin is 18% and you are operating above breakeven, it also means you are throwing away $20,000 of every $180,000 in Net Income you would have generated.

The most visible element of BPI (and BPM) is the mapping of process workflow, but process mapping involves far more than documenting – and confirming, accepting as-is – the current state of that workflow;  it includes redesigning that workflow in ways that improves it, an effort which invariably reveals other issues – the core, root causes of problems – that affect profitability and economic return.

Which makes understanding and improving workflow the means to a much more important end.

Business Process Improvement is the tip of the spear, the front-end of a continuous improvement methodology in which the activities and elements of workflow that add value are preserved, the activities and elements that add no value are eliminated, and the remaining activities and elements that enable value are refined to make the workflow more clear, more consistent, more streamlined, more connected, more succinct, more fit for its intended purpose.

In the language of a Pipeline workshop™, we want a shorter, straighter pipe.

Because it is so foundational, it is impossible to overstate the importance of understanding and improving the way work is performed, likely before starting down the long road on other improvement initiatives, likely before the process of continuous improvement moves anywhere else.

In addition to being the means to a more important end – and the front-end of a process of continuous improvement – BPI ushers in a new perspective.

It shifts the organizational view away from the internal structure of work performed in functions, towards the flow of work performed in value-adding processes;  BPI shifts the perspective from vertical to horizontal;  it turns a homebuilding enterprise 90 degrees from vertical, lays the enterprise on its side, and aligns its workflow with the value it seeks to create.

Business Process Improvement is about getting horizontal.

The relevance goes beyond the processes themselves.  Processes are the centric element of the business operating model that forms any strategic value discipline, that forms the ability to deliver exceptional levels of the specific, distinctive value demanded by a narrowly-defined segment of homebuyers.

Come.  Participate.  Learn.

 

Business Process Improvement is one of three Velocity Accelerators® (along with Critical Chain Project Management, and Open-Book Management and Team-Based Performance Compensation) that will be explored in depth at the next Pipeline workshop™, March 23-24, 2022, at the Ponte Vedra Inn and Club, in Ponte Vedra Beach, Florida.

Attendance is limited to only 30 attendees.  The cost is $945.00 per person.  For team pricing, inquire here (flgroves@saiconsulting.com).

Delivered by SAI Consulting.  Sponsored by Simpson Strong-Tie.

For more details:  www.buildervelocity.com

 

Pipeline Workshops™: Velocity Accelerators®

Posted February 25, 2022 By Fletcher Groves

If you had to choose one word to associate with a Pipeline Workshop™, it would be velocity – a vector measure defined as speed made good in a purposeful direction, and one of the two co-equal components of economic return and one of the two necessary conditions for achieving sustainable competitive separation.

As a measure of business outcomes, we want to elevate velocity to an equal standing with margin, the reason why, at every Pipeline workshop™, we highlight specific areas of production management for a deeper dive – more discussion, challenging, pointed exercises from the RB Builders: Lessons for the Pipeline© business case, etc.

These areas are known as the Velocity Accelerators®.

Velocity Accelerators® tend to be important areas that rarely receive sufficient attention;  in fact, beyond a passing understanding, Velocity Accelerator® sessions are often the first meaningful exposure builders attending a Pipeline workshop™ have had to these areas.

For the upcoming workshop (Pipeline Workshop™ No. 17, March 23-24, 2022, at the Ponte Vedra Inn and Club, in Ponte Vedra Beach, Florida), we are highlighting three areas:

Business Process Improvement (BPI):  The most basic, most fundamental proposition in the business of building homes is this:  the reason a builder exists is to make money;  the way a builder makes money is by delivering value – benefit in excess of cost – to its homebuyers and other stakeholders;  that value is delivered through the work that the building enterprise performs;  value-delivering work has to be performed in some manner of workflow, which includes work performed in processes.

Make money . . . by delivering extraordinary value . . . through the work a builder performs . . . in processes.

BPI is the front-end of a process of continuous improvement, one that fundamentally changes the perspective of workflow, and becomes the driving component of the operating model that forms a builder’s strategic value discipline.

BPI improves both the margin and velocity sides of economic return.

Critical Chain Project Management (CCPM):  Developed more than sixty years ago, the project scheduling algorithm known as the Critical Path Method (CPM) was never intended to function in the workflow environment that constitutes homebuilding production, which is essentially project portfolio management with surrounding, supporting, and embedded processes.

CPM was never designed to function in environments in which velocity is important, where faster cycle time and higher inventory turns are critical drivers of business outcomes.  Moreover, CPM is oblivious to the effect variation has on the scheduling of a production system.

Yet, Critical Path remains, to this day, the scheduling algorithm used in every ERP system designed for homebuilders.

Critical Chain Project Management (CCPM) is the leading edge – the future – of project scheduling for homebuilding;  CCPM delivers significant improvements in the management of homebuilding production – faster cycle times, higher inventory turns;  managed variation;  more Revenue, more Gross Income, generated with a planned, finite, and controlled amount of work-in-process, production capacity, and corresponding debt.

Critical Chain is about improvement on the velocity side of Return on Assets.

Our sponsor, Simpson Strong-Tie (through its acquisition of Specitup), has developed their own CCPM app, and they will be available to share that information.

Open-Book Management and Team-Based Performance Compensation:  The efforts of a homebuilding company to improve operating performance and business outcomes will become far more difficult – it will likely fail – if it does not first succeed in creating a homebuilding team that works toward commonly-held and commonly understood business goals, as opposed to being a collective of so-called teammates working toward individual goals.

What would be missing, is an underlying business logic that forms the necessary context for understanding everything else.

To become the kind of savvy, motivated, mutually-accountable homebuilding team required to compete effectively today in the business world, every member of the team has to learn the “business” of homebuilding, they have to understand their individual responsibilities as part of the overall team, and they have to understand what is at stake, individually and collectively.

That is the role of Open-Book Management.

But, it is not enough that teammates understand the business outcome that is at stake;  they must each have a personal stake in that business outcome.

That is the role of Team-Based Performance Compensation.

Open-Book Management and Team-Based Performance Compensation, used together, affect both the margin and velocity sides of economic return.

The reason we are only highlighting these three Velocity Accelerators® at this workshop, instead of the four or five we have highlighted in previous workshops, is to give these three areas sufficient emphasis.  We will still touch on two other Velocity Accelerators®:

Epic Partnering™:  Builders attending Pipeline workshops™ consistently emphasize the need for stronger trade-partnering, better coordination, more cohesiveness, a more unified approach to managing the trade side of production.

They acknowledge the obvious:  they do not have the internal resources necessary to perform “the set of all specific actions” required to bring houses through the start-to-completion process, and – as a completely outsourced supply chain – they are inescapably dependent and reliant on skilled construction resources that are in limited supply;  they understand that they can no longer dictate the terms of engagement.

Developing the business relationships that unify a builder’s value stream is both a program and a process, consisting of milestones, education, features, and rewards.

Epic Partnering™ is transformative, and it has implications on both the margin and velocity sides of economic return.

Building Information Modeling (BIM):  Building Information Modeling (BIM) explores building design in a 3D model of the three spatial dimensions of width, height, and depth (some would also say time and cost), and links to multiple databases with information on costs, schedules, specifications, engineering data, and more.

BIM integrates, consolidates, and links information;  it makes data more accurate, useful, and manageable.

As with Epic Partnering™, Open-Book Management, and Business Process Improvement, BIM has implications for both sides of economic return, for both the margin side and the velocity side of Return on Assets:  better, more collaborative designs with fewer design errors, more accurate job cost books, job budgets, and purchase orders (margin);  plans that are easier to build, with more dependable job schedules, shorter cycle times, faster inventory turns (velocity).

By some estimates, BIM can make product 35% faster and 25% less costly to build, with a more satisfying homebuying experience and a higher quality product.

Yet, for all its promise to transform the homebuilding industry, BIM has historically had a shallow and slow adoption curve, largely because implementing BIM requires a significant amount of money and resources, huge amounts of determination and resolve, a different mental model, and a willingness to abandon past practices.

Which is where opportunity often lives.

Our sponsor, Simpson Strong-Tie, will be available to share information on their BIM Pipeline and Quickstart Toolkit apps.

We like the balance between these Velocity Accelerators®:  a blend of immediate and long-range initiatives that accelerate velocity, but also improve margins.

Come.  Participate.  Learn.

 

The next Pipeline workshop™ will be held March 23-24, 2022, at the Ponte Vedra Inn and Club, in Ponte Vedra Beach, Florida.  Attendance is limited to only 30 attendees.  The cost is $945.00 per person.  For team pricing, inquire here (flgroves@saiconsulting.com).

Delivered by SAI Consulting.  Sponsored by Simpson Strong-Tie.

For more details:  www.buildervelocity.com

 

“The Pipeline game™ production simulations were a brilliant way to demonstrate and drive home the significance of cycle time improvements and improving trade partner efficiencies on ROA and Net Income.”  (Keith Porterfield, COO, Goodall Homes (now part of Clayton Homes), Gallatin, TN)

“The Pipeline Game™ is a great tool requiring the players to put into practice the principles taught in the workshop.  It’s a hands-on exercise that requires you to think, consider, and review the results of Critical Path versus Critical Chain.”  (Lisa Ramsey, Independent Consultant, Mark Systems, Mt. Holly, NJ)

“The Pipeline game™ was fantastic.  A force multiplier to the seminar.”  (Todd Schunk, Construction Manager, CalAtlantic Homes, Jacksonville, FL)

“The workshop was really effective in showing how operational decisions affect business outcomes and how risky a ‘more for more’ approach to growing a home building company really is.  The Pipeline games™ were not only fun, but they were super-effective in showing how unbalancing the production system, managing the constraint resource, and managing the right amount of WIP creates predictable operational results and maximizes financial outcomes.

“At the end of the day, running a successful business is about how much money you make on the amount of money you invest.  The Pipeline workshop™ helped me understand this better than any workshop or seminar I’ve ever attended.  I highly recommend it.

“This workshop was really eye-opening!”  (Charles Roberts, Vice President – Operations, Providence Homes, Jacksonville, FL)

Pipeline workshops™ are an intense, interactive, size-limited immersion into the principles and disciplines that drive homebuilding production.

Over the now nine consecutive years they have been offered, we have made a number of additions and changes that improve the learning that Pipeline workshops™ deliver, most notably, adding the RB Builders: Lessons from the Pipeline© business case, with its challenging set of problem-solving exercises, several of which are used with another added component, what we call the Velocity Accelerators®.

Despite these significant and particular improvements, most attendees and observers will still tell you that the most compelling part of a Pipeline workshop™ is the team-based simulation tool the entire workshop was built around.  Pipeline Games™ are a progression of production scenarios that produce business outcomes, a production simulator that reveals both the home building business and the business of building homes.

In addition to the open, sponsored Pipeline workshops™, we have used the Pipeline game™ at Housing Leadership Summits (now the Builder 100 Summit), at CertainTeed Builder Advisory Groups, at BuilderMT-Sales Simplicity User Conferences (now MiTek), with NAHB Builder 20 Groups, at the many private Pipeline workshops™ we have held for larger builders, and at other industry gatherings.

Pipeline Games™ reinforce the production principles taught in a Pipeline workshop™, most notably, the effect of variation and uncertainty on a production system, pull scheduling according to the capacity of a constraint resource, and the importance of connecting operating decisions – made on matters like flow, cycle time, capacity utilization, and the level of workinprocess – to the critical business outcomes of profitability and Return on Assets.

Look at the results from any of the previous 16 workshops, and you will see that the results never lie.  The following set of results are typical.  In every category – from Revenue, to the levels of Work-in-Process, to Inventory Turns, to Cycle Time, to Net Income, to Return on Invested Assets – the teams attending this workshop made remarkable progress towards targeted performance, often exceeding expectations.

Look at the results, and you will see something else:  the teams rarely started out that way.

The game has changed, so the metrics have changed.  And, you clearly have to play the Pipeline game™ – see the measures and calculate the results for yourself – in order to fully comprehend what the axis values mean;  instead, focus on the performance trends (y-axis), as the games in this workshop progressed (x-axis).

This was Revenue . . . higher . . .

This was inventory turn . . . faster . . .

This was cycle time, expressed in days . . . shorter . . .

This was Net Income Margin . . . better . . .

This was Return on Assets, a reflection of the co-equal components that comprise the measure:  Net Income Margin (margin) and Inventory Turn (velocity) . . . higher . . .

After the initial shock of shattered instincts, every metric was in precisely the direction you would want, precisely the direction you would learn to expect, if the underlying production principles are true, if those principles are being applied, and if real progress is being made.

Like most of the builders attending a Pipeline workshop™, the builders attending this workshop clearly learned from their participation.

They learned the principles and disciplines of homebuilding production.

Pipeline games™ teach builders to “see” production;  they simulate the environment in which homebuilding production decisions must be made – fast-paced, rapidly-changing, filled with uncertainty, risk, and variation.  It is learning based on experience and action, not lectures.

Pipeline games™ compress the learning curve.

In a Pipeline workshop™, the progression of the games mirrors the progression of the learning.  In the book that gave rise to the workshops (The Pipeline: A Picture of Homebuilding Production, Second Edition©), this is how they were described:

“Change is a necessary condition to any improvement effort, but change is difficult, disruptive, time-consuming, and costly;  the effort can fail to produce the desired – the intended – result.  Learning needs to occur without so much cost, disruption, and risk.  Managing production and improving operating and financial performance becomes intuitive and simple, but there is much to understand.  It is counter to what is taught, therefore, difficult to grasp;  it must be learned, and that is harsh when it occurs at the cost of real operating performance and actual business outcomes.”

Come.  Participate.  Learn.

 

The next Pipeline workshop™ will be held March 23-24, 2022, at the Ponte Vedra Inn and Club, in Ponte Vedra Beach, Florida.  Attendance is limited to only 30 attendees.  The cost is $945.00 per person.  For team pricing, inquire here (flgroves@saiconsulting.com).

Delivered by SAI Consulting.  Sponsored by Simpson Strong-Tie.

For more details:  www.buildervelocity.com

 

Pipeline Workshops™: What’s your Production IQ®?

Posted February 13, 2022 By Fletcher Groves

Remove any consideration of financial leverage (the equity multiplier) from the calculation of Return on Assets, and the measure of economic return becomes a function of profitability (Return on Sales) and operating efficiency (Asset Turnover).

That is the fundamental understanding that emerges from applying the DuPont identity, regarding Return on Assets.  This means that economic return is margin x velocity, which raises two questions:  (1) How much can I make on each house I build?  (2) How many houses can I build with the capacity I am given?

It is a mutual, co-equal, dependent relationship.

Is margin proficiency necessary?  Yes.  Is it sufficient?  No.  Does superior margin hold-forth the possibility of achieving any degree of sustainable competitive separation?  That possibility is highly unlikely.

We’re not alone in this assessment:

“ . . . [asset] turnover is just as important as profit margin.”  Barron’s Accounting Handbook© (Siegel, Shim), 1990, 1997, p. 150.

“ . . . [improving] inventory turnover . . . increases asset velocity, one of the most under-appreciated components of making money . . . higher velocity improves productivity and reduces working capital.  It also improves cash flow, the life-blood of any business.”  Execution: The Discipline of Getting Things Done© (Bossidy, Charan), 2002, p. 17

Those facts and admonishments notwithstanding, in the homebuilding industry, action on the margin side of Return on Assets inherently overshadows action on the velocity side of ROA.

Pipeline workshops™ are aimed at changing that paradigm.

The real motivation to attend a Pipeline workshop™ starts with the willingness to acknowledge – and a desire to remedy – what amounts to a profound lack of knowledge regarding production principles and disciplines, and the impact they have on economic return.

Let the meaning of the last part of that statement linger for a moment:

In the homebuilding industry, there is a profound lack of knowledge regarding the operation and management of production systems, and the effect those systems have on profitability and economic return.

Disagree?  Think you know your stuff?  Really?  Prove it.  Take the test.

  1. If a homebuilding production system is a pipeline, what determines the size, capacity, length, and cost of the pipe? What controls the flow?
  2. Is even-flow production a mechanism or an outcome?
  3. What is the true measure of size for a homebuilding company? revenue  b. number of employees  c. houses under construction  d. annual closings
  4. What are the three activities that describe “what happens to money” in a homebuilding business, the terms of which can be used to express and link all the formulae for operating performance (productivity, cycle time, and inventory turn) to the measures of financial performance (Net Income and Return on Assets)? What do those activities represent?
  5. What type of workflow best describes homebuilding? Is it process management?  Is it project management?  Is it a combination of both?  If it is a combination, which element does it favor?
  6. True or False: A production system that unbalances capacity across the resources that perform the work does a better job of optimizing capacity utilization than a production system that balances capacity across those resources.
  7. In what three ways will a production system seek to protect itself from variation and uncertainty?
  8. In scheduling a portfolio of jobs, which algorithm considers both task dependency and resource contention? Is it Critical Path or Critical Chain?
  9. Calculating the cycle time of a production system requires knowledge of two operational measures. What are they?  Determining the level of necessary work-in-process requires knowledge of what two operational measures?  Projecting the rate of periodic closings requires knowledge of two operational measures.  What are they?
  10. True or False: Building reasonable safety into task durations is necessary for ensuring a high percentage of on-time completions.
  11. What measure of operating performance is the reciprocal of cycle time?
  12. Lean Production views homebuilding as a build-to-order process. How does Lean recommend determining a resource to serve as the process’ pacemaker?
  13. What is the difference between measured cycle time and calculated cycle time? What is the best use for each?
  14. What is the true cost of variation in a production system? What is typically mistaken as the cost of variation?
  15. What three human behaviors consume the time safety intentionally built into a job schedule?
  16. How does the matrix for managing starts in a “push” release system differ from the same matrix in a “pull” release system?
  17. Increasing the likelihood – the assurance – that a task will finish on-time, from a 50% probability to a 95% probability will cause the duration of the task to increase by a factor of how much? What is the multiplier?  In statistical terms, how many standard deviations does this factor represent?
  18. Is trade partnering a program or a process?
  19. True or False: The NAHB Chart of Accounts Income Statement prevents a builder from calculating a breakeven point and a breakeven rate.
  20. What is the difference between velocity and speed?

We know, it’s just a quiz.  Like any quiz, the questions represent a very small portion of the operating and business knowledge required to effectively manage homebuilding production, increase operating performance, generate higher Net Income, and improve Return on Assets.

Every homebuilding company has to determine how it will manage production within a specific context, within parameters that include its market, its product mix, its choice of an information/management technology system, its financial resources.

But, the ability to manage production starts with an understanding of its underlying principles and disciplines.

It starts with what you learn in a Pipeline workshop™.

Come.  Participate.  Learn.

 

The next Pipeline workshop™ will be held March 23-24, 2022, at the Ponte Vedra Inn and Club, in Ponte Vedra Beach, Florida.  Attendance is limited to only 30 attendees.  The cost is $945.00 per person.  For team pricing, inquire here (flgroves@saiconsulting.com).

Delivered by SAI Consulting.  Sponsored by Simpson Strong-Tie.

For more details:  www.buildervelocity.com

 

Answers: 

(1) size is the amount of work-in-process, capacity is the rate of throughput (with a planned, finite, and controlled amount of work-in-process), length is cycle time, cost is all of the indirect, non-variable expenses associated with overhead, flow is controlled by the valve that allows starts to occur at the rate of closings;  (2) even-flow production is an outcome, not a mechanism;  (3) c: houses under construction;  (4) money generated through sales is called Throughput, money invested in whatever will be turned into Throughput is known as Inventory or Investment, and money spent turning Inventory into Throughput is called Operating Expense;  (5) homebuilding is multi-project (project portfolio) management with embedded and supporting processes;  (6) True;  (7) higher work-in-process, longer duration, or more capacity;  (8) Critical Chain;  (9) work-in-process and closings, expressed in units, cycle time expressed in days;  if two measures are known, the third measure can be calculated;  (10) False;  (11) inventory turn;  (12) Lean recommends using the most capacity-constrained resource as the pacemaker, one of the areas in which Lean Thinking agrees with the Theory of Constraints;  (13) measured cycle time is the average (mean) duration of a series of jobs;  calculated cycle time reflects the relationship between the inventory (work-in-process) a production system carries and the closings (throughput) it produces;  measured cycle time is about forensics, calculated cycle time is about the system;  (14) the true cost of variation in a production system is not wasted or excessive cost, it is the Contribution (Gross Income) from every house that was not built and closed because of variation in the system, Gross Income that would have dropped straight to the bottom-line as Net Income;  (15) procrastination (student syndrome), expand to whatever time is allowed (Parkinson’s Law), multi-tasking;  (16) the start matrix in a push system determines both the order and rate of starts, whereas in a pull system, the start matrix only determines the order of starts (the rate of starts is governed by the rate of closings);  (17) a factor of 1.64 (reciprocal .61), meaning that four out of every 10 days in the job schedule is padding (safety) intended to assure on-time completion of every task, and, therefore, the on-time completion of the job;  it amounts to two standard deviations;  (18) establishing epic relationships with trade partners is both a program and a process;  (19) True;  (20) velocity is a vector measure;  it is speed in a specific direction;  velocity is targeted, purposeful speed.

 

(published on EFA® every year since 2012, coinciding with the NAHB International Builders Show;  updated as needed, incorporated, and republished here, as the last in a five-part series) 

Back in April 2012, I had this exchange with Shinn Consulting’s Emma Shinn, on the BUILDER LinkedIn group, on the subject of whether the costs on the NAHB Chart of Accounts Income Statement, for financial management purposes, should be allocated according to the rules of absorption costing, or according to the rules of variable costing.

A decade later, the discussion remains entirely relevant.

The matter of how the NAHB Income Statement Income Statement allocates costs was the subject of an April 2009 post on Escape from Averageness®.  It was also the subject of a series of posts in January 2012, summarizing the results of a CFO survey we conducted on the NAHB Income Statement, preceding the 2012 International Builders Show.

Here is the exchange, in its entirety, unredacted, edited only for clarity:

Emma:  “I do respectfully disagree with your assessment of the NAHB Chart of Accounts – the purpose of the [Chart of Accounts] is to provide a structure for collecting financial information in an organized and meaningful way.  It provides builders the capabilities to produce reports that are meaningful and that will guide them in their decision-making process.

“In no way does it deter or hinder the contribution margin analysis you talk about.  In fact, it facilitates such analysis as it provides the classification of cost and expenses in a way that facilitates the identification of the variable and fixed components.

“The contribution margin analysis does not deter from the analysis of the traditional income statement and the valuable information it provides to the builders.  The contribution margin analysis does provide an expanded view and I agree with you in that builders can benefit from also looking at the income statement from this point of view as it refines further the behavior of fixed vs. variable cost and expenses.

“However, your assessment of the NAHB Chart of Accounts is unfounded and could not be farther away from the reality of what the purpose of the [Chart of Accounts] is set up to be.”

Fletcher:  “Emma, you don’t have to take my word for it. As part of the survey, we asked CFOs for their insight related to the structure of the NAHB Income Statement (i.e., line item accounts in series 300-900), as it relates to cost allocation (variable v. absorption) and management tools (breakeven, CVP, etc.).

“This an excerpt from one CFO:

“’I am intimately familiar with both the strengths and weaknesses of the NAHB Chart of Accounts.  It was a great tool for benchmarking our performance with other builders and to industry standards.  It was interesting to benchmark our company, but the statements produced utilizing the NAHB Chart of Accounts were of no use when it came to making pricing decisions.’

“The thoughtful examination of any managerial accounting or cost accounting textbook validates this CFO’s statements.”

Emma:  “Once again, I respectfully disagree with that assessment.  There is nothing in the chart of accounts that prevents a company from preparing a statement utilizing other analytical tools.  The income statement you call the ‘NAHB Income Statement’ is the standard income statement presented in any accounting principles class.

“If you want to do further analysis for specific managerial considerations, that is always highly encouraged.  However, I again say the NAHB Chart of Accounts vs. the charts of accounts I normally encounter in my reviews of builders’ operations facilitates further analysis;  it does not preclude the analysis.

“Accounting, in my view, is primarily a management tool and we continue to encourage builders to view it as a very powerful means to help direct their management decisions.  That is not to take away the role accounting also plays in reporting results to third parties, such as lenders and investors.”

Fletcher:  “Emma, the NAHB COA Income Statement has a lot of attributes.  However, there is a difference between what something ‘does not deter or hinder’ or ‘does not preclude’, on the one hand, and what it positively, proactively enables, on the other.

“That may be all our differing views are about.  However, here are two of the specific points made on the matter, posted on SAI’s Escape from Averageness® weblog in April 2009:

“’The NAHB COA Income Statement treats Indirect Construction Cost as one of the costs that is deducted from Revenue to determine Gross Profit (the only difference between Gross Margin and Gross Profit is the inclusion of Indirect Construction Cost).  But – do Indirect Construction Costs vary according to Revenue?  Probably not.  For the most part, they are non-variable costs that will most likely be incurred regardless of the Revenue produced.

‘The NAHB COA Income Statement treats Selling Expenses (including Real Estate Commissions) as an Operating Expense, as a part of overhead.  Anything allocated to Selling Expense, therefore, should be a non-variable cost.  Is that the case?  No.  The bulk of Selling Expense is a variable cost.’

“Emma – some of the CFOs in the survey were very out-spoken on this issue, and the shortcomings of absorption costing are well-documented.”

(variable costing and the Contribution Income Statement format are considered as a part of every Pipeline workshop™.  Learn more here:  buildervelocity.com or saiconsulting.com/buildervelocity-pipeline-workshops)