Real Estate: Billing & Accounts Receivable
The billing process garners most of the money that feeds American business and industry coffers. But in real estate, cash flow all too often chokes up somewhere between property sales and commission checks, leaving accounts receivable ravenous for the next meal. This frustrating state of affairs plagues large and small firms alike, and the numbers bear this out.
According to the U.S. Bureau of Labor Statistics, both brokers and agents nationwide make decent money on average. Yet some sources estimate that the annual turnover rate in the industry as a whole runs from around 45 percent to as high as 80 percent. Take for example back in 2012 when the average real estate agent completed 12 closed deals.
Certainly, long work hours, market fluctuations and legions of competitors scrambling for commissions contribute to the problem. Nonetheless, a number of industry insiders suggest that inability to effectively manage cash flow in a business that rides on commissions can leave agents and brokers out in the cold. The news isn't all bad, however. A few solid strategies applied to cash flow management can keep a real estate company solvent across the sales cycle.
Start On the Inside
From realtors and brokers to economists and analysts, pundits agree that steady cash flow begins in the office. Fortunately, getting on track typically means making a few simple adjustments. The following tactics are excellent first steps toward solvency:
- Create a business plan. This can act as a strategic plan as to where you are going and how you will get there. Once it is established then you should review it quarterly to ensure that you are staying on track as to what your goals are. By setting targets and completing other analysis’ you will be able to have a road map for your success in real estate.
- Put finances on paper. List all monthly fiscal activity, including revenue sources, receivables, expenses and debts. Hundreds of software accounting programs some less than $100 make the process relatively simple, even for agents with limited computer skills.
- Watch the pennies. Industry insiders say tracking small, sometimes unnecessary, business purchases can go a long way toward plugging budgetary leaks. On the long term, limiting administrative expenses for a predetermined period a year perhaps can help boost and stabilize cash flow.
An example: Advertising costs can drain company operating monies. Experts suggest going with those forms of media that produce the biggest return (i.e. leads) on the investment.
- Look at bank charges. Fees and surcharges may seem negligible on a month-to-month basis, but over time, these nibbles take big bites out of the operating budget. Contribute more cash to the flow by shopping for lower rates and for small- or no-fee deals, sometimes available to established businesses.
- Distinguish between bank and cash balances. Relying on bank statements to manage cash flow is a great way to go out of business. Always reconcile actual payables and receivables to what the hard copy or online account statement indicates. Again, a range of business software packages now available can assist with this chore.
- Don't mix personal and business cash. This may sound simplistic, but a number of experts point out that smaller and start-up operations sometimes fall into the trap of using their own credit or bank accounts for business expenses. The reason personal bank accounts frequently provide entrepreneurs the revenues required for start-up costs, while personal plastic pays for computers, software, furniture and other supplies. Continuing this unwise practice for extended periods muddies financial records at the very least rendering it well-nigh impossible to analyze and budget cash flow.
- Make cash flow projections. Once every accounting “i” is dotted and “t” is crossed, it is critical to estimate and project cash flow for at least a six-month period. Doing so allows realtors to plan for peaks and shortfalls within a timely framework, thus diminishing the chances of a fiscal crisis down the road.
Details on Factoring
In an ideal world, the proper financial maneuvers would stabilize cash flow and keep the receivables column in tiptop condition. But in the real estate industry, “ideal” is not the norm. Now and then, a company simply must spend money before the commission check clears.
Several analysts suggest that factoring can free up cash even before a deal closes. In a nutshell, factoring is the buying of accounts receivable at a discount (by a finance company, for instance), allowing realtors to be paid on the spot rather than waiting a month or more for their earnings. Cash-flow assured, they can then (theoretically) refocus their energies on building sales and ensuring customer satisfaction.
Overall, factors typically pay in two stages: the majority of cash on the initial advance, and the balance delivered upon commission payment. Depending on the situation, fees can run from 2 percent up to 5 percent. On the rise industry-wide since the late 1990s, factoring is a boon for real estate professionals, mostly because financing options in this sector are otherwise limited.
Even so, factoring is not for everyone and definitely is not a quick-fix for nonessential or personal expenses. For these reasons, experts say that consulting a credentialed financial professional before entering into any agreement is critical.
The International Factoring Association Web site, www.factoring.org, likewise provides a wealth of information including an extensive list of factors and is well worth a visit.