A contribution by Jörg Krbetz - financial guru, management consultant

For those in a hurry

• The trick is to fill cash gaps as cost-effectively as possible.
• Liquidity management only works if it is done with foresight
• Viable information on inflows and outflows of funds is essential
• The quality of the data basis is a major challenge - accounting and planning are not up to date
• Limits of Excel are quickly reached in the preview calculation

Fundamental importance

Adequate liquidity management is indispensable for the profitable management of real estate. As in any other industry, it is also necessary in the real estate industry to provide the necessary amount of liquid funds at the right time through effective liquidity management.

The trick is to fill cash gaps as cost-effectively as possible and to use the most favourable sources of financing. The aim should always be to take an aggregated view, i.e. to offset existing stocks and cover any gaps that may arise by using existing funds and injecting funds from external sources to cover peaks.

Timing is essential here. Emerging gaps must be identified early on to enable management to initiate appropriate measures in a timely manner. Effective and efficient liquidity management only works if it is carried out with foresight.

Challenge: Viable information

This requires that decision-makers have viable information about

• the available bank balances, i.e. liquid funds, available overdraft facilities and bank debts, as well as
• have the future expected cash inflows and outflows.

As a rule, accounting data is used to determine the bank balances; the expected values of the cash inflows and outflows are ideally derived from planning calculations. It is essential that the accounting data is complete and ready for the day and that the planning calculations - i.e. the future-related expectations - are (still) up-to-date.

These two requirements for the quality of the data basis pose a great challenge. Up-to-the-minute information from accounting would require daily posting of all receipts in the company. In fact, however, daily updated bank balances from the accounting department are rarely available, especially with a large number of bank accounts at different banks. Due to the timeliness and the usual processing cycles of the accounting material (bank statements), current planning calculations, e.g. short-term forecasts, are also not available or not available promptly.  

How are these challenges met in practice?

Actual data

As far as actual data is concerned (bank balances), telebanking reports are often used, as these reports can be used to evaluate bank balances at any time.

The next step is to transfer the data from the telebanking reports into EXCEL tables and subsequently consolidate them. With a small number of bank accounts, this appears to be a feasible way. However, the limits of this approach are quickly reached.

As mentioned above, real estate companies often have a large number of bank accounts and accounts, which multiplies the work steps required to obtain actual data. IT applications that allow direct access to all bank data are therefore recommended, so that no time-consuming individual queries have to be carried out.

Future-related data

It is comparatively more difficult to derive the future-related data required for liquidity management, i.e. the cash inflows and outflows currently expected for a certain period under consideration.

Here, too, EXCEL-based calculations often serve as the data basis. The volatile nature of real estate management (additions and disposals in the real estate portfolio, changes in rental income due to rent increases, new contracts and contract terminations, maintenance measures, additional or reduced costs in connection with renovation or construction measures, etc.) makes the production of these calculations even more difficult.

For planning purposes, it is useful to differentiate between

• constant, i.e. regular inflows and outflows, and
• those that do not occur regularly.

Inflows and outflows from management and the real estate portfolio that remain constant in terms of the amount and timing of the occurrence concern, for example

• Parts of the ongoing operating costs (supply and disposal costs, property taxes), both
• On the expenditure side as well as on the income side (operating costs charged to tenants or advance operating cost payments to be made on an ongoing basis, or
• Loan repayments and interest service.

Suitable sources are usually available for both data from rent and operating cost allocation and data from loan management, i.e. the property owner's statements from the property management(s) and the loan agreements. Specific irregular cash requirements (outflows) are to be determined on the basis of the measures planned for an observation period and supplemented by empirical values (e.g. unplanned maintenance, factor cost increases).

In addition to the inflows and outflows resulting from property management, the ongoing personnel and material costs must of course also be included in Cash flow planning . Accounting data also serves as the basis for planning here, supplemented by expected increases or decreases in costs due to changes in resource requirements and foreseeable cost increases and savings.

Limits of Excel

For the preparation of short-, medium- and long-term planning calculations, it is advisable to use specific software applications that have structuring, distribution, aggregation and simulation functions and allow different scenarios and plan versions to be mapped on different aggregation levels over the time axis. The limits of Excel are quickly reached, even in the area of forecasting.

By linking the actual data (inventory variables as the starting point) with the expected values from the planning calculation (flow variables), the funding requirements over the time axis are obtained and thus the basis for decision-making for future-related liquidity management.

It remains the responsibility of management

In summary, it can be said that efficient and effective liquidity management is only successful if it is carried out on the basis of suitable data, continuously and with foresight. To create the basis for decision-making, software applications are recommended that allow the linking of inventory data (bank balances) with planning data (inflows and outflows). As always, integrated or integrable technical solutions should be given preference, as this maintains an overview and avoids errors and redundancies.

Ultimately, as always, it is the responsibility of management to allocate resources to liquidity management, use them effectively and make the right decisions in a timely manner.

About Jörg Krbetz

Jörg Krbetz is a management consultant with many years of experience in various management positions in the financial sector. Among other things, he restructured the finance and controlling departments of a listed real estate company and introduced various IT tools, from SAP to property management programmes. He has been a friend of the COMMITLY team for many years.

Credits: Photo by riccardo oliva on Unsplash