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Cash is an important asset in the economic system and some industries, especially real estate, are highly cash intensive. In order to survive, any business would need to generate positive cash flow or inflows as against the negative cash flow or outflows. An instance of cash outflow is salary payments, payment against new purchases and so forth. However, cash outflow is recorded only when the money has been transferred from the company's bank account.
The opposite of cash outflow is cash inflow which indicates that a particular amount has been transferred to the company's bank account. The money that customers or investors pay to a company is recorded under cash inflow.
To make money and stay solvent in real estate, you need to have well calculated and accurate cash flow projections. All businesses prepare three types of financial statements namely; the income statement (profit and loss), the balance sheet and the cash flow statement. Overall liabilities and assets of a company are listed in a balance sheet while the income statement indicates the profit garnered during a particular period of time.
A cash flow statement (CFS), on the other hand, comprises both income and balance sheet statements. It contains the record of inflow and outflow of cash during a particular period. However, the CFS does not show future incoming or outgoing cash. That is the job of the Cash Flow Projection statement. In the cash flow statement, transactions are recorded taking into consideration operating, financing and investment activity. The statement first mentions the transactions made during operating activities. It mentions the total income at the top. After this, other items like depreciation, additional operating spending (doesn't include transactions), and profits (earned through property sale) are included. All these compose the net cash created through operating activity.
The second element in the cash flow statement is the investments. Any amount paid in order to buy an asset is counted as a capital expenditure or CapEx. It is a part of generating future income. Capital expenditure is important for sustaining and growing the business. Cash flow that takes place due to investment deducts capital expenditures from the profit garnered from these assets. Financing activities, on the other hand, focus on the movement of the cash between a company and its creditors and owners. While going through the cash flow statement, you should take note of the bottom line that mentions the total gain or loss of cash and its equivalents over the previous period.
Any real estate business includes normally two types of activities, property sales and property management. There will be changes in income as sales increase or decrease over a period of time. But, it takes mostly 60 to 90 days to before the income becomes cash in the bank and can be counted in the cash flow. In the case of Property Management (PM), both incoming and outgoing cash is easy to forecast and hence, it is considered a prudent strategy to have a property management portfolio. While training real estate agents, business coaches cover all these points about cash flow in great detail.
Most companies fail due to bad cash flow rather than lack of profits! Managing your cash flow is imperative to a well run business!
Nils Oman is a real estate agent, a buyers advocate and a long term property investor. He has extensive business experience and has worked in many industries on several continents. Today he coaches Principals for Real Estate companies in the art of running a successful business and having a life at the same time! For a free eBooklet on how to supercharge your company and put it on Autopilot - go to our website http://www.coachingrealestateagents.com.au/
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