New Homes for Sale by Lennar

Organization Overview 

Lennar Homes is a real estate and a construction company which is located in Miami, Florida. Lennar Homes became one of the major constructions company after acquiring CalAtlantic Homes in 2017. Lennar homes was ranked 230 th on Fortune 500 in 2018. The company is among the key players in the home industry in the United States. Since 1954, the company has been assisting individuals in developing their homes. To accommodate the ever-changing lives, the company has been building homes in various desirable regions across America. They deal with developments in the suburban, urban, and other parts which have been deemed suitable for development in the real estate industry ("Lennar Corporation - About Lennar", n.d.) . Lennar Homes operates in the service industry in the United States retail business, which involves the construction and purchasing of homes for selling. 

Size of Lennar Homes 

Lennar corporation operates in 21 states across the United States and controls Rialto Capital Management. The company is the largest home developers in the United States with regards to consolidates revenues. They also offer loans in the form of mortgage financing. With the growing housing industry in the US, the company has overseen an increase in revenues. In addition, positive economic changes and the ever-increasing need for housing has led to the growth of the industry. Due to increased performance in the industry, the revenues for the fiscal year saw noticeable growth. The revenues for the year 2018 were $20.6 billion, which was up by 63 per cent, and the values are anticipated to grow in 2019 ("Lennar Corporation - AnnualReports.com", 2018) . The company has employed around 11, 626 individuals in which 7,844 are involved in homebuilding operations, 518 engage in multi-family operations, 3230 are involved in the financial services, while 34 deal with RMF operations. 

Lennar Homes deal with anything to do with home development. They have revolutionized the real estate industry in the United States by enabling efficiency, connectivity, and incredible features which have boosted their market base. They have provided an exceptional experience to their clients which has led to improved customer satisfaction and retention. The company offers differentiated products and services and thus has led to the sustainment of competitive advantage. One of the products by the company is the Next-Gen which is intended for homebuyers who wish to split mortgage costs and living expenses. Lennar international is another product which enables the global market to purchase their homes through the company. Therefore, the company has ventured into the global market, a move which allows clients to access their services and improve their customer base. The Lennar international is a form of foreign direct investment, and the business structure of the company varies from domestic retail sales to direct investments in other countries. One of the major mortgage products the company offers is the eagle Homes Mortgage which has covered over 300,000 families ("Annual reports & proxy statements", 201 8 ) . The product is desired to serve the needs of the home buyers and is fully integrated in the operations of the company. Also, the company operates a social program which is intended in addressing the needs of the society. The establishment of Lennar Foundation in the year 1989 has served the different needs of the community. They have been engaged in promoting education, poverty elimination, and giving individuals opportunities to build their lives. 

Background of Lennar Homes 

The company operates in the home construction industry, and it is dated back in 1954, a company named F&R Builders which was developed by Arnold Rosen. The company has been in operations for 65 years and its headquartered in Miami, Florida. Today, the company operates numerous branches across the US ("Lennar Corporation - About Lennar", n.d.) . The primary competitor for the company is KB Home which is led by Jeffrey Mezger. Other competitors in the industry include D.R. Horton and Quality Eco, all who operate in the diversified construction industry. 

Budgeted Financial Statements for Building Division 

Balance Sheet 

Description	2018	2017
Assets
Cash and cash equivalents	$ 782,565.00	$ 953,261.00
Inventories	$ 4,291,470.00	$ 3,751,525.00
Other assets	$ 1,251,884.00	$ 1,061,507.00
Total Assets	$ 6,325,919.00	$ 5,766,293.00
Liabilities
Accounts payable and other liabilities	$ 875,380.00	$ 832,151.00
Debt (1)	$ 1,212,274.00	$ 737,331.00
Billing in excess of costs and profits	$ 4,238,265.00	$ 4,196,811.00
Total liabilities	$ 6,325,919.00	$ 5,766,293.00

Income Statement 

Description	2018	2017
Revenues
Lennar Homebuilding	$ 19,077,597.00	$ 11,200,242.00
Construction costs	$ 16,936,873.00	$ 9,752,269.00
Gross profit	$ 2,140,724.00	$ 1,447,973.00
Corporate and administrative expenses	$ 91,915.00	$ 61,708.00
Operating profit	$ 2,048,809.00	$ 1,386,265.00
other incomes (expenses)	$ 213,875.00	$ (196,654.00)
Income Before Tax	$ 2,262,684.00	$ 1,582,919.00
Income Tax Expense	$ 566,853.00	$ 379,131.00
Net Income	$ 1,695,831.00	$ 1,203,788.00

Evaluating and Measuring Performance 

In accounting and finance, one way of measuring performances is through ration analysis. The results from the analysis will tell whether the department is performing according to the expectations of the management ( Williams & Dobelman, 2017) . Ratios are classified into various categories which include profitability, liquidity, activity ratios, market and debt ratios. 

Profitability ratios 

These are financial metrics utilized by investors and analysts to assess and analyze the capacity of the company to generate profits with regards to revenues generated. These ratios include: 

Gross profit margin: = gross profit 2018: = 2,140724/19,077,597 = 11.22% revenues * 100 2017: = 1,447,973/11,200,242 = 12.93% 

Interpretation: Lennar Homes performance is higher in 2017 compared to 2018. The decrease may have been caused by industry changes, increasing competition, lower prices, and higher supplier costs. Declining gross profit margins are a big problem for the business and understanding such factors which cause a decrease is essential ( Robinson , Henry, Pirie , & Broihahn, 2015) . Although the revenues levels increased in 2018, the decrease lies in the costs control. 

Net profit margin: = net profit 2018: = 1,695,831/19,077,597 = 8.89% revenues * 100 2017: = 1,203,788/11,200,242 = 10.75% 

Interpretation: there is a decreasing trend in the net profit margin from 2017 to 2018. The business performed better in 2017 than in 2018, although the amount of net profits has increased. Reduction in the net profit margin is usually caused by ineffective marketing strategies, poor pricing strategies, inability to cope with market trends, and competition, which lead to the reduction of revenues. If revenues have increased in the subsequent year, the decrease in margin ratios may have been attributed to ineffective cost controls. 

Return on Assets: Net income: = net profit 2018: = 1,695,831/6,325,919 = 26.81% total assets * 100 2017: = 1,203,788/5,766,293 = 20.88% 

Interpretation: the ratio indicates how profitable the department is in relation to the assets employed. There has been an increase in the return on assets ratio from 2017 to 2018. The growth signifies profitability and business success. Increase in the ration a sign of controlled expenditures, increase in revenues, increased asset turnover, and control over debt capital. 

Liquidity ratios 

These are essential financial metrics which are used to determine the ability of the business to cover their present debt obligations without the need to raise any external capital. The ratios include current ratio, acid test ratio (Quick ratio), and operating cash flow ratio. 

Current ratio: = current assets 2018: = 6,325,919/875,380 = 7.2:1 current liabilities 2017: = 5,766,293/832,151= 6.9:1 

Interpretation: the ratio means that the assets available can cover the short-term obligations of the departments seven times before they get depleted. The ratio is higher in 2018 than in 2017, meaning there are more current assets available or less current liabilities to be covered. The department is not doing bad in terms of liabilities management. An increase in the current ratio may be an indication that the department is growing into its capacity. Usually, businesses are safer, with a ratio of higher than 3. For each $1 of current liabilities, this department has $7.2 in 2018 and $6.9 in 2017 to cover such liability. The bigger the ratio, the more creditors will trust the business’s ability to pay debts. 

Quick ratio: = current assets – inventory 2018: = (6,325,919-4,291,470)/875,380 = 2.3:1 current liabilities. 2017: = (5,766,293-3,751,525)/832,151 = 2.4:1 

Interpretation: it assesses the capacity of the business to meet its short-term obligations using the most convertible assets. Thus, the values of inventories are excluded in computations. The ratios in this department are more than one meaning the department has adequate assets to cover the current liabilities. The ration is slightly bigger in 2017 than in 2018, signifying either more there was less inventory of fewer liabilities in 2017 compared to 2018. For each $ dollar of current liability in this department, there is $2.3 in 2018 and $ 2.4 in 2017 to cover such liabilities. 

Debt ratio 

These are ratios used to evaluate the extent of the company’s leverage. The ratio is defined by the proportion of the business’s overall debt to the overall assets. In can be explained as the ratio of the department’s assets that have been funded by debt. Usually, ratios greater than 1 signifies that assets fund a substantial share of the debt amount. Higher ratios show that the company may be putting itself at default risks if the interests on loans were to rise unexpectantly. 

Debt ratio = total debt/ total assets 2018: = 1,2,12,274/6,325,919 = 19.16% 2017: 737,331/5,766,293 =12.79% 

This percentage means that the company is more leveraged in 2018 as compared to 2017. This means an increase in debt financing for the department. 

Activity ratios 

These are financial metrics which are utilized to evaluate how the department is effectively using the available operating assets and convert them into cash or revenues. The ratios are essential in assessing the efficiency of the operations of the business, through the analysis of accounts receivables, inventories and fixed assets. The activity or efficiency ratios evaluate the financial health of the business as well as the effective utilization of the balance sheet elements. Various kinds of activity ratios include fixed asset turnover, total asset turnover, inventory turnover, and account receivable turnover. These ratios have their advantages in the financial analysis, which include reliability and establishing comparison trends for business in the same line of operation. 

Return on Investment (ROI) 

The ROI is a performance measure which is utilized to assess the efficiency if a given investment or establish a comparison between a given number of investments. The methodology attempts to evaluate the returns of investments with regards to the investment cost. In order to compute the ROI, the project benefits are divided with the investment cost. The methodology can be used to assess the performance of the home building department for Lennar Corporation. The different costs in the department will be analyzed and compared with the investment costs in terms of assets. The resulting ratio will provide results regarding the performance of the department. 

Significance of ratio Analysis 

The explanation of financial information and financial reports is vital for the stakeholders of the company. Ratio analysis is, therefore, a crucial methodology in financial management and analysis. 

The importance and objective of conducting a ratio analysis are to assess businesses and their financial performance in terms of profitability, risk, efficiency, and solvency ( Harbour, 2017) . Ratio analysis assists businesses to make comparisons of two different trends over time. The interpretation of ratios is vital to both external and internal stakeholders for decisions making. As each stakeholder require different information form the ratios, it is imperative to analyze the results and trends in the market carefully. For instance, investors would like to know the growth in dividends, while creditors may be interested in ensuring they get repaid. 

Ratio analysis assists in understanding the profitability of the department under consideration. The ratios return on equity and return on assets evaluate the capacity of the firm to generate profits. The return on assets tries to establish how much the company will earn from every dollar of their assets. Other ratios, such as net profit and gross profit margins, assess the capacity of the business to translate revenues into profits. 

Ratios analyze the operational efficiencies of departments, for instance, the activity or efficiency ratios. When compared with other businesses in the industry, such ratios can tell us how the company is performing. They also measure the capability of the business to generate earnings using available assets. The ratios take into consideration the time it takes to collect debts from debtors or time it takes to convert inventories into cash. 

Ratios assist us in establishing whether the company has enough assets to cover the short-term obligations usually of 12 months maximum. These are computed using the current ratios. Moreover, they aid in the identification of various business risks. The computation of operating and financial leverage aid in the determination of business risks. Ratios also evaluate the financial risk of the business. They determine the level of dependency on external capital and ascertain whether the company is capable of repayments. In this regard, the use of ratio analysis is vital for businesses, as they assist the management in evaluating performance, planning and forecasting the future of the company. 

When the concept of ratio analysis is employed correctly, it shines a light to the various problems organizations are facing in the modern business world. They are usually whistleblowers and the draw the attention of the management towards various organizational issues which require attention. Ratios are vital in assisting in disapproving or validating any investment or financing decisions in the business. They summarize financial statements is comparative values which assist the management in comparing and evaluating the financial position of the organization and the outcomes of their decisions. Ratios also simplify the complex nature of financial information and reports into separable ratios of financial efficiency, operational efficiency, long-term situations, and solvency. Normally, an organization like Lennar Homes would be interested in making comparisons with the industry averages to determine their performance. Due to the stiff competition in the construction industry in the United States, striving to attain competitive advantage is imperative. Through the utilization of ratios, the company can establish trends using historical data from the market, and know their competitive position in the industry. In addition, it is essential to understand the position of competitors in order to establish effective methodologies of attaining competitive advantages. 

When utilizing the ratio analysis performance measures for Lennar Homes, they could come with their limitations in the evaluation of performance. For instance, changes may be made to the annual financial statements to improve such rations with the intention of manipulating the performance of the business. this will deem such ratios ineffective for decisions making. Also, ratios deal with the quantitative aspect of the business and ignore the qualitative aspects like customer satisfaction. For the home building department, the financial ratios will not solve any financial issues as they are a means to an end. They do not provide reliable solutions to the issues affecting the business. 

Internal Controls 

Internal controls are procedures, rules, and mechanisms which have been implemented by a company to detect and prevent fraud, promote accountability, and ensure the integrity of financial accounting data. Besides complying with set rules and guidelines, and assisting in the prevention of fraud, internal controls aid in the improvement of business efficiency by enhancing timeliness and accuracy in financial reporting ( Kumar & Sharma, 2015) . In the contemporary business world, internal controls are have become vital elements in business. In the United States, many businesses have embraced their use due to the accounting scandals in early 2000. Hence, the Sarbanes Oxley Act of 2002 was established to safeguard investors from fraudulent activities of accounting practices, and develop dependability and accuracies in business disclosures ( Hoag, Myring , & Schroeder, 2017) . This has impacted corporate governance in which the management has been responsible for establishing audit trails and financial reporting. 

As long as Lennar Homes follow the law, they can institute any controls which suit their business. Various controls which can be set up include the following. 

Segregation of duties: the idea of dividing p tasks is essential for internal controls. For instance, if the organization tasks one person for running a cash register in a given shift, there should be another person who should check the till until the end. The main objective of this control may not be to prevent fraud. But instead, two eyes can be effective in the identification of mistakes. Another example of duties segregation would require different people in the procurement function. On would sign checks, and the other would authorize purchases. This act minimizes the possibility of an employee embezzling by drawing ghost checks. 

Prevent and detect: other internal controls may make it impossible for individuals to commit fraud. The control of access to digital records and the accounting software is one way of preventing fraud ( Raiborn, Butler, Martin, & Pizzini, 2017) . If there are few people who enter data into the system, then there would also be fewer people who can modify it. Other controls aim at detecting errors, for instance, through the comparison of independent sets of records for a single transaction. A good example is when balancing the checkbook. There should be reasons when the ledgers do not match with the bank statement. Another method is matching vendor payments with invoices. Another way of detecting errors is through monitoring performance. If the cash flows do not match the established budgets, the explanation could be due to unexpected incomes or expenditures. It may also be due to errors made during data entry. 

Internal audits: it is not sufficient to establish rules for the set controls. Lennar Homes should, therefore, go an extra mile in determining whether such controls are working effectively. Hence, monitoring and periodic audits should aim at establishing whether employees are complying to the internal controls, or they have developed means of evading them Leitch, 2016) . The organization should establish whether employees are reporting any problems or exceptions in the controls. Also, new employees should be briefed on what is required. 

Separation of duties: this control would ensure no employees are involved in one process until completion. the duties of each employee should be clearly defined to avoid cases of mix up in duties. The individuals who deal with inventory management should not be the same ones dealing with accounting functions as manipulations may occur in the process. 

Security: this control entails the installation of security objects such as CCTV cameras to monitor the activities in the floor. It may also involve hiring a physical guard to prevent fraud and theft. This control can work effectively in inventory management, where employees are usually involved in looting stock. 

Controls are categorized in two distinct forms, the preventive and detective controls. Preventive measures aim at discouraging irregularities and errors from occurring. They comprise of proactive measures which ensure departmental goals are achieved. Examples of such controls include approvals, verifications, separation of duties, assets security, and approval. Detective controls are structured to detect inconsistencies and errors after occurrence ( William Jr , Glover, & Prawitt, 2016) . Such controls include reconciliations, performance appraisals, checks, and actual inventories. For the effective internal control system, both kinds of controls are significant. From a quality point of view, preventive controls are vital as they are usually proactive and focuses on quality. On the other hand, detective controls assist in evidence provision regarding the functioning of the preventing controls. 

In conclusion, an analysis of Lennar Corporation has been extensively discussed in this paper. The organization operates in the construction industry and has seen growth in revenues due to changes in the real estate industry in the United States. The balance sheet and income statements for the homebuilding department have been extracted from the company's annual reports, and analysis of ratios has been conducted to assess the department's performance. The department is therefore moderately performing, and the only issues concerns cost control. Various internal control measure shave also been discussed on how the department can ensure detection and prevention of errors and fraud. 

References 

Annual reports & proxy statements. (201 8 ). Retrieved 7 December 2019, from http://investors.lennar.com/financials/annual-reports-and-proxy-statements 

Carcello, J. V., Eulerich, M., Masli, A., & Wood, D. A. (2018). The value to management of using the internal audit function as a management training ground. Accounting Horizons, 32(2), 121-140. 

Harbour, J. L. (2017).  The basics of performance measurement . Productivity Press. 

Hoag, M., Myring, M., & Schroeder, J. (2017). Has Sarbanes-Oxley standardized audit quality?  American Journal of Business ,  32 (1), 2-23. 

Kumar, R., & Sharma, V. (2015).  Auditing: Principles and practice . PHI Learning Pvt. Ltd. 

Leitch, M. (2016).  Intelligent internal control and risk management: designing high-performance risk control systems . 

Lennar Corporation - About Lennar. Retrieved 7 December 2019, from https://www.lennar.com/about/about 

Lennar Corporation - AnnualReports.com. (2018). Retrieved from http://www.annualreports.com/Company/lennar-corporation 

Raiborn, C., Butler, J. B., Martin, K., & Pizzini, M. (2017). The internal audit function: A prerequisite for Good Governance.  Journal of Corporate Accounting & Finance ,  28 (2), 10-21. 

Robinson, T. R., Henry, E., Pirie, W. L., & Broihahn, M. A. (2015).  International financial statement analysis . John Wiley & Sons. 

William Jr, M., Glover, S., & Prawitt, D. (2016).  Auditing and assurance services: A systematic approach . McGraw-Hill Education. 

Williams, E. E., & Dobelman, J. A. (2017). Financial statement analysis.  World Scientific Book Chapters , 109-169.