Cash flow is the glue that holds together your real estate agency. Let it dry up and financial troubles will creep up on you. As an agency owner, ongoing cash flow forecasting should be part and parcel of running your business – not an annual exercise, but a monthly checkpoint that will help your agency stay in great financial health.
Unfortunately, the very nature of real estate means that those who operate within the industry are cursed with frustrating delays in income with a wait for commission. Whilst much of this cash flow uncertainty can be eliminated with flexible commission advance services, there’s still plenty you can do yourself when it comes to accurate cash flow forecasting.
Here’s our tips on successful cash flow forecasting for your agency:
Get realistic about your agency’s position
Be careful not to leave on your rose-tinted spectacles. Be as objective as you possibly can be about your agency’s projections. It may even pay off to veer on the conservative side with your cash flow forecasts (but perhaps a little more optimistic when it comes to goal setting!). Forecasting a 75% increase in property sales might be possible, but is it realistic?
Don’t confuse cash, income and profit
It’s easy to get carried away with plugging healthy sales figures into your cash flow forecast, but don’t forget that a sale isn’t actual cash – until you’ve received the commission on that sale. Your agency might be tracking well on income and profit, but if liquidity has dried up, then it will prove impossible for your business to keep functioning.
Be realistic when you schedule the receipt for cash. Allow a two or three month delay once contracts have been exchanged – or look into commission advance services to eliminate such delays.
Plan for multiple revenue scenarios
Because cash flow forecasting is essentially a guessing game, you can never know for sure what your real estate sales will be over the coming months. We suggest you forecast for three different scenarios. A most likely scenario, a ‘best case’ and a ‘worst case’ scenario too. That way you have a wider view of what cash flow requirement you may have in the future. With your best and worst case scenarios, we suggest about 25% higher and lower than your likely scenario.
Don’t forget the small stuff
When doing your cash flow forecast, ensure you don’t leave out planning for those smaller expenses that seem insignificant (for example postage, utility bills or some stationery for your office). Omit enough of your smaller expenses and you’ll soon find a large deficit in your projections. This is especially important if your forecasting is on the more ‘optimistic’ side and you haven’t left much room for movement or variance.
Separate your fixed and variable costs
Fixed costs are much easier to forecast for obvious reasons. Ensure that you give your variable costs extra attention. Your agency’s variable costs (such as marketing, electricity or air-conditioning) will change throughout the year, depending on the season, the market and other factors. Ensure these seasonal variations are reflected in your projections.
Bear in mind also, that if you’re predicting an increase in property sales, your variable costs will increase too. And vice versa.
If you enjoyed this post, you might like to check out What to do when your real estate cash flow is MIA, Finance tips for real estate agencies and How to maintain steady cash flow even when real estate is slow.