Financial Record Keeping Can Be Fun — Well, At Least Tolerable - 11/1/2004 - Mortgage Loan Refinance Debt Equity

Financial Record Keeping Can Be Fun — Well, At Least Tolerable

Some builders set up lists of bookkeeping accounts to record financial transactions — but don’t consider their own management needs. It is not unusual, therefore, to find operating expenses listed in alphabetical order and providing limited information; often, just the individual amount spent for each type of expense and the total amount spent for operating expenses. With this set-up, a company can’t analyze its performance efficiency in various functional areas.

NAHB Chart of Accounts Is Structured for the Way Home Builders Do Business

NAHB has developed a list of accounts known as the NAHB Chart of Accounts (chart of account links are for NAHB members only). It was developed by CPAs specifically for home builders, remodelers, developers and commercial builders and provides a structure that each home building company can customize for its needs. The NAHB Chart of Accounts is available free to members and can be downloaded from the NAHB Web site. 

Some of the benefits of adopting the NAHB Chart of Accounts include:

• Accounts are grouped the way home builders do business.
• Revenues and cost of sales accounts are set up to keep track of each revenue-producing activity — which lets you evaluate the performance of each activity. For example, the NAHB Chart of Accounts includes separate accounts to record the sale of new homes and the sale of remodeling services.
• Expenses are grouped into the four operational functions each home builder performs (Again, you can analyze the performance of each function or activity.):
  • Construction (indirect construction costs)
  • Financing
  • Sales and marketing
  • General and administrative functions
• There is a separate group of accounts to record expenses related to rental properties.
• You get descriptions of the accounts and the types of transactions that should be recorded in each account.
• Meaningful numerical codes facilitate transaction processing and management report preparation.
• Transactions are recorded uniformly and consistently, which allows for comparative analysis of prior periods or years. This, in turn, facilitates analysis of your business.
• Adopted as the home building industry standard, it allows for comparison of industry-wide financial information.

Using the NAHB Charts of Accounts does not change the amount of time it takes to record transactions, but the quality of your accounting and management reports increases exponentially.

Organized by the Numbers

The NAHB Chart of Accounts uses a numerical system to classify the five basic types of accounts in any accounting system; assets, liabilities, owner’s equity, revenues (sales) and expenses. The following list illustrates the basic groupings of accounts and the numerical coding assigned to each group.

• 1000 Assets
• 2000 Liabilities and Owners’ Equity
• 3000 Revenues (Sales) and Cost of Sales Operating Expenses
• 4000 Indirect Construction Costs
• 5000 Financing Expenses
• 6000 Sales and Marketing Expenses
• 7000 Operating and Management Expenses
• 8000 General and Administrative Expenses
• 9000 Other Income and Other Expenses

All Functions and Expenses Can Be Accommodated

As mentioned above, the NAHB Chart of Accounts was designed to accommodate the four functional areas (and their associated expenses) that every home building company performs: construction (indirect construction cost), financing, sales and marketing, and general and administrative functions.

• Indirect construction costs include all expenses incurred in running the construction operation or department, such as supervisors’ salaries, construction trucks, construction trailers, subdivision clean-up and temporary toilets.
  
   
• Financing expenses include all interest, points and service charges related to the financing of construction activities or any other company purchases. Also included are all the costs paid at closing, including points, taxes, fees and other miscellaneous charges.
  
   
• Sales and marketing expenses include all expenses associated with selling homes, such as advertising expenses, in-house and broker commissions, models, brochures and signs.
  
   
• General and administrative expenses include all other expenses that cannot be classified in the first three categories. Examples include training and education expenses, charitable contributions, trade association dues, etc.

Rental expenses: Also included in the NAHB Chart of Accounts is a classification for rental expenses. These expenses are accumulated in the 7000 group of accounts and include all expenses related to leasing rental property. The 9000 classification is reserved for out-of-the-ordinary expenses that do not occur during the normal course of business. An example is the gain or loss from selling a company vehicle or any other type of equipment that has been used in the business’s normal operation.

How’s Business? You’ll Know If You Properly Allocate Costs and Expenses

Some builders allocate the cost of supervision, financing expenses and commissions to each house they build. They then include those expenses in the cost of sales amounts on their income statements. However, when they review their income statements, these builders don’t know what they spent on the materials and labor used to build the houses.

Mixing all types of costs and expenses in the same pot precludes the analysis of each area. Successful builders need to know how close the actual costs of their houses come to budgeted or estimated expenses and how well each function performed. The ability to measure, dissect and analyze performance is invaluable for any size builder. It overcomes the uncertainty of how a business is doing and provides guidance on where and what to focus on to improve the operation.

Since the early 1970s, NAHB has been collecting builders’ financial information and publishing it in the “Cost of Doing Business Studies.” The information is collected using the NAHB Chart of Accounts format. If you structure your accounts under the same format, you can easily compare your financial performance to other builders in the country.

Adopting the NAHB Chart of Accounts doesn’t require any extra cost, time or training. By incorporating this tool into your business, you can significantly improve the quality of your accounting reports, support your management decisions with facts and figures, become a better manager and see how your financial performance stacks up against the rest of the industry.

Emma S. Shinn, a certified public accountant and author or "Accounting and Financial Management, 4th Edition," has worked in the home building industry since 1970. She is a business consultant with the Lee Evans Group in Littleton, CO, and is a guest lecturer at universities and home builder seminars. She is an active contributor to and past chair of NAHB’s Business Management & Information Technology Committee.