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

Since homebuilding is an industry that leverages equity with debt, some version of Return on Equity has to be the final measure of a homebuilding enterprise’s economic return.  However, from an operational perspective, leverage doesn’t have to be considered, which makes Return on Assets the most useful operational measure of economic return.

The essence of the DuPont identity tells you that non-leveraged economic return has two co-essential – but not necessarily co-equal – 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, as it should be.  This allows us, when we calculate Return on Invested Assets, to equate Asset Turnover (a financial measure) with Inventory Turn (an operational measure).

What is the point, you ask?  The point is, you want to thrive in this business, not just survive in it.  In order to thrive, you have to excel on both the margin side and the velocity side of ROA.  That understanding proposes two fundamental questions:  (1) How much money can my company make on every house it builds?  (2) How many houses can my company 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 your 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, out-performed – by a better than twotoone margin – in terms of the Net Income you earn and the Return on Assets you generate.

You will struggle to compete;  ultimately, you will struggle to survive.

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

It is also the picture of your 180-day cycle time versus your competitor’s 90-day cycle time, and if a 90-day cycle time seems unachievable under current circumstances and makes the comparison unreasonably stark, then consider a more subtle scenario:  your competitor – the one with the 18% Gross Margin and now a 3x turn – still produces a better Return on Assets than you can with your 24% Gross Margin and 2x turn.  It is the picture your 180-day cycle time versus your competitor’s 120-day cycle time.

At this point, you should be asking yourself what happens when this competitor becomes your equal on the margin side of ROA.

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 not Revenue or closings, but, rather, the amount – the burden – of work-in-process you each have to carry.

This is not a choice forced between achieving higher margin or achieving higher velocity (and if it was a choice, you would be a fool not to take velocity, which is a multiplier of non-variable costs);  rather, it is the challenge – and the opportunity – of achieving both, of multiplying higher margins by higher velocities.

Very few builders will meet that challenge or avail that opportunity.

Despite the obvious advantages, the demands of achieving higher velocity – the demands of generating higher productivity – are so hard, require so much rigor, so much discipline, so much resolve, that most builders won’t even attempt it.

And, therein lies competitive separation.

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 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;  the cost during early registration, open through January 14, 2022, is $795.00.  For team pricing, inquire here (flgroves@saiconsulting.com).

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

For more details:  www.buildervelocity.com