The real estate market is tough and you’re making just enough to cover your bills. Then the transmission in your car goes out, you become ill, or some other disaster strikes and you’re hit with a cash-flow crunch.
A major challenge any business faces is managing cash flow. "Cash flow" is what we have left after taking all deductions, including car expenses, computer equipment, marketing, etc.
Another way of looking at cash flow is the money available to support the working needs of your business. You can be profitable at the end of the year and still have a cash-flow crunch. This is especially common in real estate, where you may have one large check and then go several months until you receive the next one. Cash flow is extremely important because without it your business will stop.
To avoid being ambushed by a cash-flow crunch, take the following steps:
1. Build a reserve
The simplest way to avoid being ambushed by a cash-flow crunch is to have a cash reserve. Ideally, you need a minimum of six months of income in the bank to cover all of your expenses — both business and personal. To build your reserve, start allocating part of every commission check to your cash reserve fund.
2. Prospecting time is sacred
Failure to prospect regularly is a major reason that Realtors experience a cash-flow crunch. If you’re facing a cash-flow crunch, get busy calling past clients, calling on owners of expired listings, holding open houses during the week, or anything else that has generated leads for you in the past. In other words, put yourself in front of as many potential clients leads as possible.
3. Monitor and reduce market time
During the last 12 months, what was the average time it took each of your listings to sell? How many houses did you have to show a buyer before they purchased? If you don’t know the answer to these questions, it’s important to start tracking this information immediately.
You could sell exactly the same number of properties that you sold last year, but if you cut listing market time or the number of houses you show buyers by half, your profitability (the money you keep) will increase dramatically.
4. Opportunity costs
There is a cost associated with marketing a property or taking buyers out to look at property. For example, when you spend time taking out a buyer, your "opportunity cost" is all the other activities you chose not to do that could have generated income. Consequently, it’s always smart to ask: "Is working with this buyer or seller or engaging in this activity going to yield the highest amount of return for my time?"
A slightly different question is, "What can I choose to do that will give me the maximum amount of return for the minimum amount of time invested?"
5. Create a percentage budget
Do you have a budget for your business? If so, is your budget fixed or is it a percentage budget? A fixed budget means you allot a certain dollar amount for each item. In some cases, budget items are fixed, such as board membership, errors and omissions insurance, etc. Some items, however, are not fixed. Examples include marketing expenses, advertising, open house expenses, etc.
With a percentage budget, you allot only a certain percentage of your income to these expenses. Thus, if I allot 10 percent of my gross sales revenue for marketing and I earn $2,000, I should limit my marketing expense for this month to $200. If my income this month is $8,000, I can spend $800. This approach allows you to easily adjust to variations in your income while helping you to control your cash flow.
How to handle a crunch
1. Pay cash
Paying business expenses with a credit card may be convenient but it’s also an easy way to get into trouble. A better approach is to use a debit card or a check. When you have no more money in the account, stop spending until you do.
2. Credit cards: the most expensive way to finance a crunch
If you must use a credit card, do your best to pay off the entire balance every month. Otherwise, you’ll end up paying an extra 12 to 25 percent per year in credit card interest. This is the least effective way to deal with a crunch.
If you must borrow, consider opening a business line of credit. Many local business banks as well as some credit unions are happy to work with you if you have good credit and are willing to run your commission checks and credit card charges through their lending institution.
3. Become your own bank
Do you have money in a retirement account? If so, liquidating it can cost you a tremendous amount of money. A better approach is to borrow against the account.
For example, one of my friends has some money tied up in a limited liability company (LLC) that holds stock. Rather than selling stock when he needed money, he took a loan at 6 percent interest. Since he has two other partners, he was paying 4 percent of the loan to his partners and the other 2 percent to himself.
Always be sure to check with your CPA or financial adviser about the best possible route for your personal situation. With a little bit of planning and forethought, you can avoid a cash-flow crunch in your business and keep your commission income strong all year long.