The Self Taught MBA: A Conversation with Mike Benshoof, MD for the Ailing Builder
The son of a homebuilder, Mike Benshoof first set foot on the jobsite at age 13. He swung a hammer through his early 20s, when he went to college. Mike then spent seven years at NVR, a national homebuilder, in production and sales management. Following, Mike pursued an MBA with a concentration in Finance and Economics and then became the Director of Business Analysis for the Economics Group at the National Association of Home Builders. During his time at NAHB, Mike authored several books. Today he is a frequent speaker at NAHB’s International Builder Show and various local HBA’s. He is the author of the best selling builder book, Financial Management for the Non-Financial Manager and the co-author of Business Planning, and the SMA Sales Manual, a complete and definitive guide for new home sales representatives which is available by calling 407-447-5209.
An MBA with over 20 years experience in new home construction, financial and operational management, Mike brings us a perspective honed through his SMA Consulting firm, which has coached hundreds of builders on best industry practices. He also co-founded and is the President of Red Door Homes, a scattered site home building company.
Who are your clients at SMA Consulting, and why do they seek your services?
Mike Benshoof: Typically, our clients are homebuilders or remodelers in their mid 30s to early 50s who have been in business for many years. They call us when the pain becomes unbearable. The details vary with each client, but the basic problem is always the same: not enough money, too many hours of work. The business runs them, and it’s not running in the direction they want to go.
How do you help this builder?
MB: I start by asking the builder where he or she stands financially today, both personally and businesswise, and then I ask, “Where do you want to be tomorrow?” For example, a builder calls when he realizes he’s not going to be ready for retirement. Maybe he has $150,000 in cash savings, and a consultation with a retirement counselor revealed he will need at least $1,000,000 to retire comfortably. The builder knows he only has about a decade to make it, and yet by saving the $25,000 a year he’s been putting aside, it will take him 34 years. It’s my job to figure out what he can change in his business to make it happen within his time horizon, make a plan, and then help him achieve it. Typically, we stay involved one or two years until the builder’s well on his way to achieving financial independence.
You described an impossible situation; in your example this fellow would have to quadruple his savings to retire. How can he achieve it?
MB: It’s tough, but we can do several things, we can improve a builder’s gross margin and lower his expenses, and most important, create a system in the process so that he can keep it going. But to achieve anything, we have to start by getting the builder onto true management accounting. This is different from tax accounting, it’s the ability to measure all aspects of the business and know not only the year end gross and net profit, but what type of jobs make the builder money, what it takes to get those type jobs, and how many of those the builder needs to meet his goals. In other words, the first step is setting up a system to measure every aspect of the business and obtain useful management information from which we can make decisions.
There’s a client of ours that’s got a tree removal and roll off service, so we spent time setting up a set of books that parsed every revenue stream until he could clearly see where he made money, and where he didn’t. Was it in cutting trees, grinding stumps, removing trees from the property or just dropping and pulling roll-offs?
We determined the number of trees he needed to remove to break even and then make a profit, we did the same with the roll-offs, and then set about finding the relationship between calls to the office, roll-offs pulled per day, and the number of tree removal bids required to turn 10% of those bids into a profitable workload. Every successful enterprise measures every aspect of the operation. You have to understand that numbers are not a scary thing. It’s just the stuff you need know before you can make your business profitable.
But there’s got to be more to it than just tracking the money.
MB: It’s not all financial accounting; it’s also systems and management. We all know we need a system-but what is it? A system is made of four, interdependent parts. Successful businesses like Southwest Airlines and McDonalds have it down, and it’s a set of manuals with policies, procedures, standards and specifications. That’s what you buy when you spend a million on a MacDonald’s franchise; a set of manuals with benchmarks and procedures that are company specific, for example, you learn exactly how long McDonalds targets for each drive-through order. They target 1.45 minutes, and about 30% of their drive-through windows hit that target, they know it can be done. And those that don’t hit the mark analyze why they don’t hit it, and it’s generally because they are not following the procedures. This is the true purpose of accounting, not taxes. It’s the feedback loop that tells you when you’re in line with your benchmarks, whether you’re winning or losing. If you have all four of these parts in place, policies, procedures, standards and specification, then you have a business, a system that you could package and sell.
There’s also you, the person behind the business. We start our consulting relationship by doing a personality profile, which allows us to understand how to design a business model that exploits our client’s strengths and compensates for their weakness. A company came to us, they did remodeling, fencing and artificial turf, two brothers, who felt they were not making enough money, and the relationship between them had become stressful. Both brothers said they wanted a substantial amount of money, but their personal priorities were tugging them apart. Each brother wanted something very different. One brother wanted a family life; the other was single, driven and financially ambitious. In the end, we split the business. One brother took the high growth business, he worked his tail off to make a lot of money and he still does, his business has become a monster and he loves the lifestyle. The other brother took the low intensity, steady Eddie part of the business, and he’s done very well with it, but most important, he has the time to enjoy a very satisfying family life.
You have a book on financial management for builders; can readers buy this on Amazon?
Look, my dad was a builder. I started working with him at age 13. I worked through high school and beyond and eventually quit because the business never had enough money, it was always stressful, and my dad was never home for his family. I then worked with some of the biggest and most organized builders in the US, earned an MBA and studied economics, I worked as an economist at NAHB, and it was then I gradually realized my dad was not uniquely challenged, he was typical-a very good builder with no formal business education. It’s not enough to be an entrepreneur you have to graduate to business person. I went back and I helped my dad set up his business with meaningful metrics and controls.
In the eyes of every builder I help, I see my dad’s face. My dad’s face is the guy who works 60-70 hours a week, he can’t spend any time with his family, he can’t take time off, there’s no off button on him at all. The business has become a habit, an addiction. As long as it took to get my dad’s business on a flat footing, it took him even longer to unwind. Once he began to make money, and know it, he began to take vacations. He’s retired now, he works three days a week because he wants to, and he’s making more than before. With all my dad gave me in life, this is the one thing I was able to give him in return that I’m most proud of.
Without a formal business management background, how can average builders set up the necessary systems and know what adjustments to make?
MB: I hear builders talk baseball or football statistics for hours, yet many have no head for business metrics. It’s a mindset to start, and then an education. Think of your business as a game, a very serious one, but like any game, it has rules and a score. You have to know if you’re winning or losing. It takes work, but it’s not impossible. An average builder needs to track about 10-15 metrics. It’s a little different for every trade and type of builder, but some basic measure may include, how much total revenue do I need? How much gross margin? How much overhead can I sustain and still make a net profit that achieves my yearly benchmark for retirement? Answering those four questions is a good start.
Then we go to questions such as, how many times do I need the phone to ring to get the number of jobs I need? If I need three jobs a year, then my phone has to ring three times a month based on a ten-percent conversion ratio. Or, how many jobs do I need to keep my crews working year-round? Whatever the question, you work your way to the answer by thinking backwards. If I want my crews working 51 out of 52 weeks, how much do I need to sell each month? Now you have a target to shoot towards and a score you can track in real time. This puts the horse back in front of the cart.
Can a builder do this on their own, without a consultant like you?
MB: We spend one or two years working with each client. We teach the smaller builder how to be self sufficient. The day our client says. “I got it, I don’t need you anymore,” that’s the day we know we succeeded. You can do it on your own if you’re willing to read a lot of books and put the different pieces together. Start with my books, because they were written for builders specifically-not because I make any money at it, I don’t. Like I said, send me an email and I’ll get you gong for free. And you have to focus on reducing construction costs, because that’s the easiest way to improve gross margins, and that’s where I recommend your book (Building an Affordable House). I include a recommended reading list in my Business Planning book; you’re welcome to share it with your readers.
We also offer coaching groups, nine or ten remodelers that are similar that share the cost of a business coach and provide pear support. If you’re an NAHB member, I highly recommend using the resources available through the national organization; in fact I teach financial management and strategic planning during the International Business Show. The NAHB offers incredible resources, and you can obtain a lot of benefit joining the 20 Club Program. The 20 Clubs are comprised of similar type builders or remodelers from non-competing markets who meet several times a year to learn from each other. Members share and compare financial information, look for trouble spots, and offer each other advice on how improve their performance.
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