Margins are not Profit – By Moskowitz Capital
Margins are important. They need to be monitored, tracked, and reviewed. However, they are not profit and at the end of the year, profit is what counts. One skill that separates a good builder from a great builder is understanding this difference.
Start-up builders are often so focused on margins and cost, that they fail to move their projects and businesses forward quickly enough. It is akin to “paralysis by analysis” or “missing for the forest for the trees”.
Profit is the end goal for a business and in addition to margin, sales volume and inventory turnover plays a large role in that equation. Increased turnover has a knock-on effect for a builder. It increases brand awareness, reduces the risk of the capital injected into a project, and allows for greater economies of sale.
The more you build, and sell, the more the marketplace will be aware of your brand. Creating satisfied homeowners allows for them to share their positive story with their friends and family, populating your sales channel with prospective buyers. The more marketing signs you have in a neighbourhood and the quicker the build process, the more you reinforce to the community that your business is a productive and stable brand. Creating a positive reputation is an asset to a home builder and one that separates a good builder from a great builder.
Intervening events happen and the sooner a builder can recapture the capital they placed at risk, the less likely one will occur. Builders who are slow to turnover projects increase their exposure to:
- the local real estate market, where once a builder makes the build decision, the project value now fluctuates with the ups and (more concerning) downs of local market prices;
- the overall economy, where potential customers may face job losses, reducing their chances of qualifying for a mortgage;
- interest rate risk, which changes the demand for real estate and the pool of potential customers due to affordability measures;
- regulatory risk, such as changes to mortgage insurance or bank underwriting guidelines;
- shock events, like the COVID-19 pandemic.
Builders can generally forecast the near-term, however medium and long-term forecasts are murky at best, and avoiding unnecessary delays avoids risk.
Economies of Scale
Building more gets a builder better access to high quality trades, which in turn creates a high-quality project, then a sale, a positive reputation, and the ability to start the next project. Selling more boosts the efficiency of your marketing team and spend. Running a larger business often is more efficient as fixed costs, like office space, staff, and professional fees benefit from shared costs.
Builders need to keep an eye on their margins, but also keep an eye on the end goal and not letting maximizing each and every decision stop them from creating what would otherwise be a great project.