Toll Brothers, Inc., is a large builder of luxury homes across the United States. From 2000 through 2006 it experienced continuous growth in revenues that averaged over 24 percent annually. Not only did it experience growth from year to year, but its revenue grew in each quarter of 2005 and 2006. Then things started to slow down. In 2007 its revenue dropped by 24 percent compared to 2006. Additionally, its revenue declined in two of the four quarters of 2007.
Management of the company commented as follows in the company’s 2007 annual report.
In the late summer and fall of 2005, there was a modest deceleration in the growth rate of demand. Additionally, in the aftermath of Hurricane Katrina, gas prices rose to $3.00/gallon and consumer confidence dropped precipitously. When the music stopped, many territories were overwhelmed with excess home inventories. . . . We believed that a national geographic presence would provide some diversification of risk to insulate us from the type of local market crashes or regional declines that had characterized previous industry downswings. . . . However, the national scope of this downturn and the rapidity with which it swept across the nation suggest that there was greater correlation among regional housing markets than we had previously believed.
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In January 2006, it appeared that consumer confidence was starting to firm until a wave of subprime fears in late February 2007 took the momentum away. The financial markets began to develop jitters as word spread that subprime loan foreclosures might soon bring hundreds of thousands of additional homes onto the market. . . .
Required
Assume you are Toll Brothers’ budget director. Write a memo to the management team explaining how the practice of continuous budgeting could overcome the shortcomings of an annual budget process in an uncertain market situation.