Most people who have built their own home would have you believe it was a thoroughly satisfying and life-affirming experience. Well, having done it myself, I can tell you that is not the entire story. There are some stressful times such as digging out the foundations when you risk finding something unexpected that could blow a hole in your budget. But if you put aside a realistic contingency budget and manage your project well, you end up with exactly the house you wanted at well below the market price. House builders and property developers face similar challenges, but on a far larger scale and with much greater complexity.
House-building; a sector on the rebound
After a few lean years, new home starts are at the highest levels since 2007 both in the USA and most countries in Western Europe. This is good news for developers. However it is unlikely to be plain sailing like it was before the economic crash. The sector has always had one of the highest incidences of insolvency and there is now evidence that banks are being more cautious in lending to builders. In addition, selling prices have yet to recover to previous levels. All of this suggests developers will have to work harder to achieve satisfactory margins. Whch is also why it should be no surprise that publicly listed construction companies figure highly in Ernst & Young’s latest Analysis of Profit Warnings in the UK.
Planning and control are the keys to success
It’s a complex business. Managing a portfolio of plots of land for building houses or retail development needs careful planning, particularly when it comes to cash flow. Liquidity is a major challenge for property developers. They need to know the exact status of each property they are developing, and how near it is to being sold, so they can accurately forecast their future cash position way into the future in readiness for acquiring the next plot of land. It is also important to have a solid understanding of which type of properties sell quickest, tie up less working capital, and generate the most profit so they can decide how best to develop new sites.
This means having accurate and detailed data across their entire business so they can drill down through their portfolio to see the status of each new house, its scheduled start date, the forecast of when it is likely to be sold, and the amount of direct and indirect cost assigned to it. That way, sales forecasts are extremely accurate as they are generated from the plot level up. This also gives managers greater confidence in their cash flow forecasts when they are acquiring land assets for future developments. This is vitally important for a builder as the windows of opportunity for securing new plots is often very tight, making it important to be able to quickly assess the long-term financial impact of tying up working capital in new land assets.
Identifying the ideal solution for site and plot planning
In the past, house builders tended to build their own solutions using a series of spreadsheets that each addressed a specific step in the planning and reporting process. But today there are a number of solutions specific for this sector including Anaplan’s own Site and Plot Planning app. These deliver a number of important benefits that will help developers through the challenging times ahead:
1. Integrated, real-time reporting
When spreadsheets are being used, getting a complete picture of profitability and cash flow involves sequentially updating each worksheet, calculating it, and importing the results into the next model up the chain. Inevitably this involves numerous manual processes and takes considerable time. The newer solutions integrate all steps of the process so when site managers and business managers update forecast selling prices and completion dates, all downstream sales and cash flow forecasts and financial reports are automatically updated in real-time. This gives much-needed insight into how changes to schedules impact financial outcomes, which is exactly what you need to convince a bank to provide short-term financing.
2. Quick and easily re-phasing of sites and plots with real-time feedback
Business managers can quickly re-phase build schedules and forecast sales dates either individually or for entire groups of properties with a few key strokes. This allows them to immediately see how their changes impact cash flow and profitability – unlike spreadsheets and less automated solutions where this can take days.
3. Insight into profitability to maximize returns
Assigning ‘notional’ (aka standard) costs to different types of property and importing actuals from the ERP system gives a complete understanding of project and plot profitability. This in turn helps business managers maximize the return on future developments by optimizing the mix of property types.
4. Quick and easy feasibility studies
Being able to rapidly copy an existing model, quickly update assumptions about the potential number and type of properties and their associated ‘notional’ costs, and get instant results provides developers with a complete understanding of the likely returns before they bid for new land assets.
Developers clearly need this type of functionality to take advantage of the upturn in the market. One company that has already abandoned spreadsheets for an integrated solution is Story Homes, a large developer in the North West of England that is currently enjoying 60% year-on-year growth. When the company used spreadsheets, generating a new cash flow involved three man-days of effort for each site. And with 26 to 30 sites in progress at any one time, the total time sink came close to 90 days. Today, using the Anaplan Site and Plot Planning app, it’s done in a matter of hours. And because their site and plot management is now so quick and easy, they have been able to extend their planning horizon from three to 15 years giving them better visibility of their working capital requirements. Click here to read the complete case study.