Homebuilders, It's Time to Turn Your Business Around

Most private home builders and a few public ones are struggling just to keep their doors open. With further declines or stagnation likely to continue through mid-2009, turning things around NOW is no longer an option.

If your company, region or division is doing the same closed sales volume as it was in a previous year, e.g. 2002, have you gone back to analyze your budgets from that year and compared them to your current operating budgets? Clearly, if the entity was profitable then, it should be capable of being profitable today.

Reducing employee counts to levels of the most recent year with comparable sales volume and reigning in other expenses to reflect that year's business results is a good start toward restoring positive cash flow. Creditors are more likely to agree to a restructuring of debt if they can see a probability that the company can soon restore positive cash flow.

Of course, few things can hurt a home builder more than rumors about layoffs or discontinuation of operations in certain markets. Such rumors affect employees, prospects, trade partners and others in extremely negative ways, and they should be arrested quickly. Even if far-reaching actions must be taken to survive (and they well might), clear and forthright communications should be delivered at the earliest possible moment. When properly structured, “bad news” messages are far less harmful than leaving employees in the dark.

Perceptions that a company is hemorrhaging money to the extent that homeowner deposits may be lost or creditors will be unable to obtain repayment of loans can become exaggerated to the point of beginning an unfortunate self-fulfilling prophecy.

Some problems may not be readily apparent, and management may lack the objectivity to properly diagnose them. Often, managers are following a strategy that was sensible during the boom times but no longer is viable given the realities of a protracted downturn. For example, some managers may equate survival with preserving margins, when in fact cash that's quickly generated is more critical to survival.

Reduced margin contracts that can proceed quickly to closing with a quick infusion of cash should be, without question, a higher priority than high-margin deals, which these days are in short supply anyway.

Among the more common reasons that management may not recognize the real problems: no longer managing by the numbers; neglecting to constantly benchmark the competition; and not thinking outside the box to foster real improvements in the company's performance. In such cases, the best strategy may be to bring in a consultant to review matters impartially and without prejudice.