How Cash Flow Can Matter More Than Profitability
All businesses must be mindful of cash flow, but the real estate community is particularly susceptible to fluctuations in the ebb and flow of income. In fact, poor cash flow management tops the list of failed real estate development enterprises, coming in above lack of profitability, according to the Construction Financial Management Association.
Cash flow projection
The first instinct when money is tight often is to go after more work. Before embarking on new ventures, put together a realistic projection to help decide whether additional projects make sense, as well as determine an appropriate scope. A proper projection will include a comprehensive road map of projects for the coming year with a monthly breakdown of cash flow needs and expected non-job outlays, such as labor overhead, insurance, taxes, and permits. Use historical payment data to calculate an average for planning purposes, and compare against the expected revenue by month.
Strategies to ease negative cash flow periods
A sound projection is always enough to keep cash flow problems at bay. Matching long-term assets with long-term debt is an effective strategy in freeing up cash for other purposes. Improving your change order management can also help here—increase margins on change orders to compensate for cash outlays. Billing and collection procedures should be fast and efficient, with follow-ups in place to deal with any slow payers.
Look at your cash position before making investments that will affect flow. Always think cash first. Whether you’re negotiating contracts, budgeting for a project, or buying office supplies, think of it as a chance to improve your cash flow; it’s the lifeblood of your business.
To fully understand how these laws may be relevant to your bottom line, please contact Larry Wood, CPA/CFP and Partner at DZH Phillips, one of the most competent and prestigious accounting firms on the west coast. Larry brings a wide breadth of experience to the table, with a particular emphasis on real estate and income tax planning. Click here to contact him to discuss your specific needs, or email him directly at LWood@Dzhphillips.com.