The next step is to develop policies and procedures that will enable you to collect timely and accurate data for your financial management reports. This starts with the use of a solid chart of accounts which is specifically designed for a custom home builder. Transactions should be recorded using the accrual method of accounting (costs reported when the invoice is received, not when the check is written). Invoices should be entered into your accounting system using cost codes which correspond to your estimates (which should also be entered into your accounting system).
Revenue and costs from pre-sold homes should be accounted for using the percentage-of-completion method of accounting, while speculative homes are accounted for using the completed contract method of accounting. The accounting system should include procedures for the development of a monthly work in progress analysis which is updated for both change orders and budget changes and revenue adjusted monthly for over or under billings.
The ultimate financial management system should include complete documentation of all steps within the accounting process from opening the mail through coding the invoice though entry of data into the computerized system through processing the checks and filing the necessary paperwork. A documented system provides continuity when personnel change as well as checklists to make sure that no step of the process is missed.
Armed with an operating budget and a system to collect timely and accurate data, the next step is timely review of the following critical financial management reports:
- Nine-column format income statement
- Comparative balance sheet and ratio analysis
- Work-in-process report
- Cash-flow forecast report
In my next column I will discuss the information that is contained in each of these reports as well as how custom builders can use these reports for continual improvement.
