It’s the number one rule for any small business - cash is king. This is true whether you’re just starting up or operating an existing business. Having a good grasp of the basic factors influencing your cash flow will result in a solid and stable real estate business, regardless of what’s happening in the market.
The first critical thing to consider is liquidity, or your access to cash. It doesn’t have to be actual cash in the bank; it can be a credit facility. The important thing is that if you need cash, you can get it quickly.
For a start up business ideally you should have access to six months working capital; that’s enough to pay all the bills for six months in the unlikely event you don’t make a sale. And remember, this is outside of the money you will need to launch the business including fit-out and equipment costs. The time it takes for a start up to generate cash flow will vary. In my experience, independent businesses will generally take longer than franchised businesses to start making money. This is due to branding issues and the time it will take to coordinate the setup without support.
If you’re taking over or operating an existing business, you should have three months worth of working capital, outside of purchase costs. This is because you should have some cash coming in straight away with an existing business, especially if there’s a rent roll attached.
Once liquidity is assured, there are several other key areas to focus in on. These are the “holes in the bucket” and they’re the unnecessary cash leaks which affect many real estate businesses.
The first relates to advertising. It’s never a great idea for your business to pay for advertising just to get listings. In fact, wherever possible get vendors to pay for their advertising up front. At the very least, get a credit card number. The last thing you need is to be left holding the baby when the bill comes in.
Secondly, recruitment is important for the growth of your business. You need to have a firm strategy and manage outcomes when you’re investing in new people. Ultimately, their productivity will determine the success of your business. Explore the different packages available to you like commission only arrangements. Focus on minimising your cash commitments.
Next watch your fixed overheads closely. The costs of equipment leases and administrative staff should be carefully reviewed. I’ve seen plenty of businesses who have signed up to hire purchase agreements at significant expense. With procurement companies around who will find you the best deal there are good and easy opportunities to minimise costs. Most franchise groups will also have some sort of arrangement in place to help out here. In terms of staff, make sure non-income producing staff like personal assistants are really necessary.
Lastly, look closely at all the “nice-to-have’s”. Focus on your core business and maintain your profile but monitor your spend on unnecessary things like expensive parties, intricate flower arrangements, donations and the like. This goes for your personal spending too. Make sure you can afford it if you’re looking to buy a jet boat or a new BMW. The cost could be far greater than you realise.
The biggest mistake I see principals make is when they see their cash flow heading south and are too embarrassed or fearful to ask for help. They may have started their business without expert advice and so started out behind the eight ball from the beginning. They think they’re alone but they’re not. And often with a measured approach even the worst problems can be solved.
If your business is in trouble and you’re not sure what’s going on, get some help from an expert. Facing the problem gets you halfway to fixing it. And if you’re at the start up point or thinking about it, get some preventative advice and avoid cash flow problems down the track.
Chris Mercer is a chartered accountant and the director of Live Business Services. His extensive experience in the real estate industry dates back to 2001 where he helped launch Ray White Group’s Wealth Partners across Australasia. Since 2006 he has operated his own business, providing consulting and outsourced bookkeeping services to a variety of real estate offices around the country. Chris has worked with hundreds of principals both branded and independent to improve their business’ profitability.
