Happy Tuesday Reader!
This email is a continuation of my series on understanding basic homebuilding finance terms and concepts. In the past three emails, I've covered the three parts of a Balance Sheet:
- Assets
- Liabilities
- Owners' Equity
Now it's time to review the two primary classes of financial data on your Income Statement:
I want to focus on Revenue this week, and I'll wrap this small financial series up next week with Expenses. For those of you who have joined this newsletter in the middle of this series - know that I cover all kinds of homebuilding business things in bite-sized chunks.
So let's talk about Revenue.
Most understand it has something to do with money your Company receives for doing work. And that's pretty much correct - but it goes a little deeper than that.
Truth be told, I never fully understood this concept myself. I thought ANY money received from the customer went to my revenue line immediately.
So, if a customer was giving me a draw payment (and we deposited that money), I immediately thought "Revenue!"
But as I explained in my Liabilities email two weeks ago, that customer draw is usually considered a Liability when first received. That's because, technically, it COULD be returned to a customer if something happened and/or until you fully gave them a completed product.
In "best practices" homebuilding accounting, that customer draw is a temporary liability until the house is fully delivered to that customer and they take possession.
At that time, the draw (liability) converts to Revenue - fully earned payment for performing the services they hired you to do.
Many Home Builders put their Revenue amounts into big buckets. They often divide them into different product types they sell. Things like:
- Custom Homes
- Production Homes
- Remodeling
And that's a good start (and certainly better than just lumping ALL revenue into one BIG bucket.
If you're doing something similar in your business, I'm going to challenge you to think a little deeper. I want you to start breaking out your revenue with even more detail.
Take any of the big buckets you may be using now, and consider breaking each one of them down as follows:
- Base Product Revenue (this is the revenue for buying your original product with NO options or extras added).
- Option Revenue (the amount you charge for any Options or Extras to that Base Product above)
There are a few more Revenue line items you can use to further separate this - but first things first. Start to record the revenue between Base and Options first.
And when you start to see the Revenue broken out like this, you'll realize that if you record your homebuilding expenses (known as WIP) in the same breakouts, you start to see where you're truly making (or, gulp, losing) money on your jobs.
Next week, I'll finish out this series on the main sections of your homebuilding financials. I'll discuss Expenses - and - will review how you can understand that not all expenses are, um, expenses.
Stay tuned - and - Happy Building!
-Brad