In the 26 years we have conducted the financial study, we have accumulated a landmark historical record of home building companies’ financial and operational performance: the challenges, the changes, the adjustments, the improvements, the victories, the defeats, and the comebacks. It has been a privilege to have gained your trust to allow me access to the most sensitive information from your companies. I thank all of you for your continued participation and support.
This study is not representative of the home building industry as a whole. The companies participating in this study have attended at least one of our management seminars offered by Builder Partnerships/The Shinn Group, or are clients of Shinn Consulting. Therefore, this study is a representative sample of those companies.
The 2018 results show a slight decrease of 0.31 percent in the average net profit from 9.02 percent in 2017 to 8.71 percent in 2018. As shown on the chart below, the results for 2018 mirrored very closely the 2017 results. The decline in the average net profit of 0.31 percent was caused by an increase in cost of sales of 0.05 percent and an increase in operating expenses of 0.26 percent. In turn, the increase in cost of sales was caused by an increase in direct construction cost of 1.53 percent, offsetting the decrease in land cost of 1.48 percent.
The next two charts show the relationship of the two components of cost of sales (land cost and direct cost) and the four operating expense categories (indirect, financing, sales and marketing, and general and administrative) from 2006 to 2018. You can track how the components performed during the 13-year period.
As you can see, the changes in the four components from 2017 to 2018 were minimal, showing slight increases in sales and marketing and general and administrative expenses. Since 2012, our sample indicates the builders have achieved a balance between these expenses and the annual sales revenues.
Year after year, no matter the percent of net profit for the year, the relationship between gross and net profits holds true, as shown on this next chart. As the gross profit increases, the net profit also increases. The four point in the chart represent the four quartiles in which we segment the sample data. Therefore, it is essential builders pay close attention to the two numbers deducted from revenues to arrive at gross profit: land cost and direct cost.
Another interesting chart from the study shows the array of net income from the sample, with a spread of net income from -5 percent to 21.73 percent. Looking at the details behind the numbers, neither the size of the builder, nor the price of the homes show a direct correlation to profitability, as shown in the next two charts.
As I look into the operations of the high-profit builders, the management teams of these companies exhibit a lot of discipline in the implementation of sound systems and processes that streamline the operations. Another common factor is their intrinsic knowledge of who their customer is, what they want, and what they are willing to pay for. This knowledge provides the builder with the information needed to maximize the value for the customer including in their homes only those features that are desirable.
I like to compare the highly profitable builders with the low-profit builders to better understand the financial makeup of their operations. As you can see in the next couple of charts, the cost of sales of the profitable builders is right at 70 percent or below, while for the low-profit builders, it is as high as 90 percent. Once again, this reinforces the importance of protecting the gross profit as the first step in achieving superior profits.
Our 2018 annual financial and operational study has been completed and is ready for distribution. For more comprehensive information on what builders are doing, click here to order the study.