Be ready to react no matter the outcome. As economic factors deploy either in a favorable direction or exacerbating the challenges that are peeking into the future, the time to plan for a change of direction is now.
To emerge successfully from these turbulent times, home builders must be prepared to react immediately to whatever changes occur, be it continued increases of interest rates, changes in customer expectations and demands, increases in material cost and delivery times, labor cost increases and availability, increased competition in the market place, drops in sales volume, increases in sales volume, or price ceilings. These external outcomes are generally out of your direct control, but the responses are entirely in your control, and the speed in which you implement changes to adapt your business strategies, policies and procedures determines your success or failure.
Planning is the most basic and critical management function. However, it is mostly overlooked by managers who tend to react as changes are occurring. Internal factors such as product offerings, pricing, promotions, giveaways, and staff levels remain under the control of management teams.
At this time, home builders need to focus on preparing the 2024 business plans. With all the uncertainties on the horizon, what assumptions should be used? What will the market be like in 2024? Will it remain the same, will it deteriorate, or will it actually improve due to the strong housing demand we have? There are uncertainties everywhere we look and yet we cannot afford to wait to develop plans, budgets and strategies to be ready to direct the company on the right path no matter what we are facing in 2024.
Always be prepared no matter the outcome. To accomplish this, work on your business plan, and because we are dealing with so much uncertainty, plan for all eventualities. Prepare a plan for the most likely outcome in the future, along with plans for an optimistic and a pessimistic outcome, where you set up courses of action based on hard decisions determined without pressure and emotional distress. Reaction time is critical to survival and success.
There are three important considerations for your planning strategies:
- Velocity versus profit: Velocity will be determined by sales price; profit will be determined by good management of cost in relationship to price and the right balance between volume and operating expenses. Velocity could have a negative impact on profits when a drop in sales price is not accompanied by a reduction in cost. Additionally, changes in volume could have a negative impact on the balance between volume and operating expenses.
- Gross profit needs to be adequate to sustain operating expenses and a desirable net profit. Gross profit is what remains after the cost of the lot and the direct cost of building the house is deducted from revenues or sales price. Adjustments in these areas might require review of product offerings to allow for changes in affordability and buyer preferences. Gross profit will also be impacted by the management of the purchasing process as well as efficiencies and control of waste during the building process.
- There needs to be a balance between operating expenses and sales volume. As sales volume decreases, gross profit may not be affected if sales prices and cost remain stable with direct construction cost decreasing proportionally with the decrease in sales price. However, operating expenses will not change with changes in volume, as they are typically fixed in nature and were set up to handle your existing sales volume. Most of these expenses are staff related and thus hard to adjust when you experience a decrease in volume. You need to establish triggers for action in this area for either direction. If volume decreases, operating expenses can eat into your gross profit and leave you with a loss. If volume increases, you need to have a hiring plan in place to make sure you maintain your efficiencies in operations and do not overburden your present staff.
The three budgets you develop to account for present expectations, along with optimistic and pessimistic outcomes, must be detailed and consider all tough decisions that would have to be made if the future changes from your present expectations. Preparing for all outcomes allows for quick reactions and will set you up to have a competitive advantage operating at a favorable profit margin, and more importantly, to be able to survive the uncertainties of our present economic environment. Start planning now and be in a strong position to take advantage of the opportunities that will be available on the other side of these uncertain times.
Shinn Consulting is here to help. Contact us at 303-972-7666 or email@example.com to learn how we can help you prepare for economic uncertainty and emerge on the other side stronger, more profitable, and in a better position for growth.