Transcript:
If you’re a home builder, you’re likely wondering whether you can afford to start new jobs before your current ones close. Having a clear plan to know whether you can afford the next home comes down to understanding your plan for that next development and what your costs are on your current jobs.
In other videos, I talk about whether your job costing is up to date and accurate enough for you to correctly know your costs going into a job. If that data is set up accurately, you should have the information you need to feel confident deciding whether to start a new development.
As you know, when you start building a home, you might be buying the land and developing it without a customer, or you might be holding the land until you find a buyer. Or you might have a buyer, but there are still draws to come before you can recoup the costs you’ve already put out, whether that’s materials, permitting, your own financing costs, or your overhead.
Another thing to account for is that as your business grows and you start more homes, you’re likely going to have more administrative costs. That could be project managers to do estimates, office personnel if you have a physical presence in your market, or receptionists. All these costs add up as you grow. So the decision isn’t just about the incremental cost of building one new home, but also the additional costs your business will incur as it continues to grow. Not every expansion immediately leads to added overhead, but as your business grows, you’ll naturally hit tiers where your team’s current capacity becomes a bottleneck for managing the workload.
Ideally, you’d always have a known buyer before starting the next home, but that’s not always the case for every home builder. Especially early on, you may not have proof of work to show potential buyers so they trust you enough to contract with you before seeing any of your work. Often, as a home builder, you may be buying the land, building the home, and paying all the costs without knowing who the buyer is.
That means your only source of financing is whatever working capital your company already has, or self-financing through a construction loan or some other line of credit. In the meantime, you’re floating all that cash through that financing, and the longer you hold it, the more expensive the development becomes. You could potentially have hundreds of thousands of dollars leaving your business before any money comes in. Homes might sit for an extended period, potentially months, so from the start of the build to the sale, you could easily be looking at a year of costs going out without knowing whether or when you’ll get the cash return you were expecting.
The biggest pitfall many home builders fall into is not thinking through all those incremental costs, whether that’s the longer period it takes to actually sell or the increase in overhead between when you start developing the home and when it sells. The most important tool you can have is a well-developed cash flow forecast for your business.
If you’re building just one home, it might be pretty simple to figure out. But if you’re already working on 10, looking to develop another three, and expecting dozens of purchases and sales over the next year, that’s a lot to account for. A cash flow forecast is a great tool for you as an owner, and the accuracy of anything that looks into the future will only improve with a strong foundation of job costing and bookkeeping processes on the back end.
