Leadership

Ready Or Not, It's Almost 'Pencils Down' Time For '23 Budget Plans

A wide range of business scenarios is plausible for the year ahead. Here are a couple of ideas on approaches to a sounder final budget and an 'ambidextrous' defense and offense to pick up a competitive edge.

Leadership

Ready Or Not, It's Almost 'Pencils Down' Time For '23 Budget Plans

A wide range of business scenarios is plausible for the year ahead. Here are a couple of ideas on approaches to a sounder final budget and an 'ambidextrous' defense and offense to pick up a competitive edge.

September 1st, 2022
Ready Or Not, It's Almost 'Pencils Down' Time For '23 Budget Plans
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One of homebuilding's strategic leaders on the acquisition, development, and construction lending front answered a question of mine earlier this summer. I'd asked about national, regional, and local companies' preparation and business fitness in advance of a rough ride ahead. Without missing a beat, the answer was unequivocal.

Yes, they – mostly -- had prepared. And yes, they – mostly -- are fit.

Homebuilders we do business with and are talking to have dramatically reduced their debt, and their gross margins and operating margins are better than they've been in recent memory, and their cash flow is strong, and they've got more customers than they do houses for them," this national lending executive told me. "I think they should be in much better shape than they were leading into the GFC."

The reference to the Global Financial Crisis between 2007 and 2009 was to say in effect what we've heard often the past several months as market conditions showed signs of weakening in the wake of the Federal Reserve's funds rate and fiscal tightening pivot: "This time's different."

Companies by the hundreds foundered during the two or three year Great Recession. They weren't ready for what hit then. The lead-up to the GFC was all about funny money, exotic financial instruments, byzantine debt stacks, credit derivative swaps etc. This time, it's less about funny money, more about free money. Have more of it. Use it. Spend it. Invest it. We the people will worry about the future of it, so you don't have to.

Businesses in the homebuilding sector, like households themselves, are less leveraged now. Their owned land assets have grown more valuable. Despite a run for their money on the input costs fields in their balance sheets, that was okay. They'd always preferred to handle challenges on the supply constraint end of things rather than having the other problem ... a slackening among takers.

But are they readier now for the ways the economy can and will behave – not as invested experts expect it to, but as it does?

Budget planning for many companies in post Labor Day September enters a last-round of pushing and pulling among division and business discipline leaders and their revenue drivers and expense centers.

Anyone who's participated in business budget planning knows it's typically a grand experiment in games theory. Decoys, reverse psychology, low-balling, go-gets, reality checks, stand-offs, resource reallocations, portfolio management decisions or decisions not to decide, cost actions, etc.

The disciplines all get upended when demand becomes the big question mark, rather than supply.

A good time for professionally managed homebuilding company leaders then to open to resources available to them for budgeting in times just like now.

For starters, have a look at a primer on budgeting during a time of great uncertainty that might be helpful. It's from Harvard Business Review contributors, Simon Freakley, ceo and Lisa Donahue co-head of New York City-based AlixPartners.

The authors recommend four steps as part of this year’s budgeting process: Tune up your financial warning system, maximize cash generation, lay out potential downside scenarios (for yourself and competitors), and don’t make the mistake of extrapolating from last year.

To be truly fit, come what may in a period of high uncertainty, Freakley and Donahue urge business leaders to gear their budgets for "action, not just control."

Starting with those field-level "low-ball" estimates of units and revenue and how those estimates roll-up, to where higher-ups raise the projections to offset the sandbagging, to where regional leaders come back with a "go-get" for more units and more revenues, to where top strategists ultimately peg the budgeted projection, this cascade of feigning and dodging is occasion for trouble, starting with a tough 2023 calendar first quarter.

The soundest system for budget calculations now comes through in Freakley and Donahue's analysis here:

Focus first on key customers, with whom you should be having candid, regular conversations. As you should do on the expense side, identify how, when, and by whom every change in revenue will be produced — proof (as best you can establish it) of the numbers in the plan. Track those projections in monthly and quarterly reviews. You can add still more value to revenue planning by analyzing customer profitability. Often 20% of customers are actually losing you money. A healthy company should regularly examine and prune its customer list.

What's more, as the uncertainty, doubt, and threat continuum plays out, truly prepared organizations will finalize budgets that play on both defense and offense heading into a year that promises a bumpy patch ahead.

Volatility, housing's boom and bust cycles prove again and again, is a time some organizations ignite value as others flail about in the turbulence.

Check out this piece from McKenzie & Co. practice leaders Michael Birshan, Ishaan Seth, and Bob Sternfels.

We see two types of business leader emerging. The first type adopts a cautious and defensive posture in dealing with the volatility and uncertainty. These leaders are hunkering down and concentrating on the threats here and now. Scenario planning, resilience preparation, balance sheet management, near-term efficiency drives, and careful inflation monitoring are core areas of their focus. These leaders are in a strategic “wait and watch” mode as conditions unfold. In our experience, the majority of senior executives fall into this category.
"But we see a second type of leader as well—one who is taking all the right defensive actions while also leaning into the volatility, using it as a catalyst to galvanize action around new opportunities. The current disruption has invigorated these leaders’ mindset of moving forward boldly, and they are rejuvenating elements of their strategy that may have been dormant. These leaders are playing both offense and defense."

Again, a key take-away of this strategic approach is diametrically opposite to bracing for the next Fed interest rate hike. It's right there in your backlog, one of the most valuable dashboards into human psychology and consumer behavior in any business of any kind.

Birshan, Seth, and Sternfels write:

  • How intimate an understanding do we have of our customers and end consumers, and are we able to gather changes in consumer sentiment rapidly and continually?
  • Do we have a mechanism to pick up signals from across the organization, including geographic leaders and commercial financial planning and analysis, on a regular basis—or, better still, in real time—and distill them quickly into options the organization can act on?

Certainly, the national AD&C lending strategist we talked with offers a strong take on how firms have hardened themselves financially to risk and threat in light of stresses and shocks ahead.

However, it's another executive, a national chief of operations from one of the top 15 homebuilding organizations that expresses perhaps a truer senses of how enterprises have readied themselves for a rougher ride.

Talk to every one of our customers at least once a week," he says. "That's not only going to give us hugely valuable insight into what's going on with those customers; it's going to give our team members a first-hand experience of the kind of resiliency and resolve our company's going to need to keep doing what we do."

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ABOUT THE AUTHOR

John McManus

John McManus

President and Founder

John McManus, founder and president of The Builder’s Daily, is an award-winning editorial, programming, and digital content strategist. TBD's purpose is a community capable of constant improvement.

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John McManus

John McManus

President and Founder

John McManus, founder and president of The Builder’s Daily, is an award-winning editorial, programming, and digital content strategist. TBD's purpose is a community capable of constant improvement.

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