From the Management Message Archive

The Five Keys to Business Success . . .

Message:

Last week, we started our conversation about the 'ten components of job cost control', and we'll continue with that in the very near future. But after the week we had last week at SMA, I need to take a detour to address an increasingly common set of issues threatening the success of our clients (and lots of other builders we encounter).

So let's back up.

I am continually amazed by the sophisticated product, polished business plans, and explosive growth of some builders who look stellar to the outside world... but in reality are teetering on the edge, or are already in the throes of major operational peril because they have forgotten (or never learned) the five keys to any business's success. So this is a generic talk about the keys to success in any organization, but we need to get them front and center.

The Five Keys to Success:

Cash Flow

Profitability

Customer Satisfaction

Employee Relations

Leadership

No business can succeed long term without the proper balance of all five of these ingredients. Unfortunately, almost every builder who calls my office looking for assistance, is painfully unaware of at least one, if not several, of these business basics.

Cash Flow:
Cash is the life blood of any business. The business plan must include a careful analysis of your cash sources and uses. Securing a line of credit to ensure adequate cash during slow source periods is often overlooked, but is critical for homebuilders. Unfortunately, your friendly banker will not be able to extend this type of credit to you without a detailed plan of where and when you will need funds...and where and when you will be able to repay and emerge in a positive cash position.

In bubble markets, we routinely see clients who are forced to make decisions go/no-go on a piece of property within hours of when it comes on the market, or lose it to the competition. Add to this the snowball effect of funding the work-in-process of uncontrolled growth, and we routinely see builders who are very profitable on paper, but can't pay their bills month-to-month because all of their available cash is chronically tied up.

Unfortunately, they are overly optimistic planning when the finished lots will come online, when sales and closings will materialize to pay back the loans, and almost always underestimate their cash flow requirements as a result.

Profitability:
Profitable closings are the final key to solving cash flow dilemmas. Without solid profit on every job, sales volume only delays the inevitable catastrophe of business failure. But in their enthusiasm for land and sales volume, we see builders in hot markets just assume that profits will follow with their ability to continually increase selling prices, regardless of how poorly they have controlled their costs along the way.

At SMA, we are fond of saying that "gross profit, when correctly defined, is the single most important benchmark of home building success". Each passing day reinforces that sentiment for me.

Customer Satisfaction:
There is not a business owner in the world who won't tell you how crucial customer satisfaction has been to their success. That one magic metric "would you recommend to a friend or family member" pretty much says it all, for any business.

However, this year I have seen countless builders not measuring customer satisfaction at all...some measuring it but doing nothing with the results....and most with nobody in their organization whose primary role is to ensure a positive customer experience throughout the builder's interface with the customer - from sales through warranty.

This proves, once again, that good markets can make up for a host of basic business sins short-term. But when things slow down (which they will), would you rather be the builder with the 95% "would you recommend" and the database full of positive testimonials...or the builder with 75% customer satisfaction and the inbox full of demands for past-due warranty service and other unresolved issues?

Employee Relations:
When the markets are good, we often see common problems strike. Employee turnover and escalating salaries have become major concerns for most builders. Yet again, our industry is slow to respond to simple human resource practices that ensure effective hiring, employee satisfaction (and retention), and most importantly, motivation for them to do a good job and instill employee/employer loyalty.

I have had builders tell me that their competition has hired away good employees by offering sizable pay increases, yet these same builders can't tell me what their training budgets are for this year... or when they can, the training budgets are so small they're almost non-existent.

When we suggest that 5% of base salary compensation be budgeted for ongoing employee training most roll their eyes and express concern over the amount of money we are suggesting. Yet what is the cost of constantly losing and having to hire and re-train new staff?

Remember, money ranks number four on the list of reasons an employee is satisfied with their job. Do you know what the first three are?

Leadership:
Leadership is an extension of all of the above items but it is at the forefront of my concerns for the industry today. More and more regional and local builders are finding market opportunities to grow in the good business climate of the past three years. However, most of these builders do not understand that successful growth is contingent upon good...no make that great leadership. Yes, we often need systems, standards, benchmarks, and sometimes money for successful growth; but we always need leadership.

Leadership is necessary to manage a growing company. Leadership is what allows you to transition from being an entrepreneur with good ideas, to a management organization with great results.

Those who "make the grade" either develop the skills of leadership, or they find a capable leader or leaders to assist them in running the business. The success of these hired or promoted leaders is in turn dependent upon the boss' or owner's ability to stay out of the way and let them lead. The business founder can then learn to direct his or her entrepreneurial spirit elsewhere in the business.

Please make sure that your business plans, your improvement strategies, and your day-to-day operations are keeping these five business basics as key targets.

Next week, I'll revive the cost control series with a look at job cost control component number two: construction standards. Now I have to go and update an old employee survey that I used at Wayne Homes in the old days. Where is that thing. . . ?

Have a great week! Bob

For additional information on this management tip or any other homebuilder management concerns call us at 407/447-5209 (Florida office) or 909/335-9100 (California Office).