Cash flow planning in the real estate industry

An article by Jörg Krbetz – finance guru, management consultant

For those in a hurry

• The art lies in filling emerging cash gaps as cost-efficiently as possible
• Liquidity management only works if it is done with foresight
• Sound information about inflows and outflows of funds is essential
• The quality of the underlying data is a major challenge – accounting and planning are not up to date
• The limits of Excel are quickly reached when it comes to forecasting

Why it matters in principle

Adequate liquidity management is indispensable for managing property profitably. As in every other industry, in the real estate sector too it is necessary to use effective liquidity management to provide the required amount of liquid funds at the right time in each case.

The art here is above all to fill emerging cash gaps as cost-efficiently as possible and to draw on the cheapest available sources of financing. The aim should always be an aggregated view, that is, offsetting existing balances and covering any gaps that arise by using available funds and bringing in funds from external sources to cover peaks.

Timing is essential here. Emerging gaps have to be identified early so that management is able to initiate appropriate measures in good time. Effective and efficient liquidity management works only if it is done with foresight.

The challenge: sound information

This presupposes that decision-makers have sound information about

• the existing bank balances, that is, the liquid funds, available overdraft facilities and bank debt, as well as
• the expected future inflows and outflows of funds.

To determine bank balances, accounting data is usually drawn on; the expected values of inflows and outflows are ideally derived from planning calculations. What matters here is that the accounting data is complete and up to the day, and that the planning calculations – that is, the forward-looking expectations – are (still) current.

These two requirements regarding the quality of the underlying data are a major challenge. Information from accounting that is up to the day would require every document in the company to be posted daily. In practice, however, bank balances that are up to the day are rarely available from accounting, especially where there is a larger number of bank accounts at different banks. Because of the timeliness and the usual processing cycles of the material to be posted (bank statements), current planning calculations, for example short-term forecasts, are also unavailable 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, since these reports allow bank balances to be evaluated at any time and up to date.

In the next step, the data from the telebanking reports is transferred into Excel spreadsheets and subsequently consolidated. Where there is a small number of bank accounts, this appears to be a viable route. The limits of this approach are quickly reached, however.

As mentioned, real estate companies often have a larger number of banking relationships and accounts, and the work steps required to obtain actual data multiply accordingly. 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.

Forward-looking data

Deriving the forward-looking data required for liquidity management – that is, the inflows and outflows currently expected for a particular period under review – is comparatively more difficult.

Here too, Excel-based spreadsheets often serve as the data basis. The inherently volatile nature of property management (additions to and disposals from the property portfolio, changes in rental income through rent increases, new contracts and terminations, maintenance measures, additional or reduced costs in connection with refurbishment or construction work, etc.) makes producing these spreadsheets even harder.

It is helpful for planning to differentiate between

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

Inflows and outflows from property management and the property portfolio that are constant in terms of amount and timing include, for example,

• parts of the ongoing operating costs (utility and waste disposal costs, property taxes), both
• on the expenditure and on the income side (operating costs charged to tenants or advance payments for operating costs to be made on an ongoing basis) or
• loan repayments and interest service.

Suitable sources are usually available both for the data from rent and operating cost accounting and for the data on loan management: these are the owner statements from the property management company or companies and the loan agreements. Specific irregular funding requirements (outflows) have to be determined on the basis of the measures planned for a period under review and supplemented by empirical values (for example unplanned maintenance, increases in factor costs).

In addition to the inflows and outflows arising from property management, the ongoing personnel and material costs must of course also be included in liquidity planning. Here too, accounting data serves as the basis for planning, supplemented by expected additional or reduced costs due to changed resource requirements and foreseeable cost increases and savings.

The limits of Excel

For drawing up short-, medium- and long-term planning calculations, we recommend using specific software applications that offer structuring, distribution, aggregation and simulation functions and that make it possible to map different scenarios and plan versions at different levels of aggregation along the time axis. In my view, the limits of Excel are quickly reached in the area of forecasting as well.

By linking the actual data (stock figures as a starting point) with the expected values from the planning calculation (flow figures), the funding requirements along the time axis emerge, and with them the basis for decisions in forward-looking liquidity management.

It remains the responsibility of management

In summary, it can be stated that efficient and effective liquidity management succeeds only if it is carried out on the basis of suitable data, continuously and with foresight. To produce the basis for decisions, we recommend software applications that allow the stock data (bank balances) to be linked with the plan data (inflows and outflows). As always, preference should be given to integrated or integrable technical solutions, as these preserve the overview and avoid errors and redundancies.

Ultimately it is – as always – the responsibility of management to provide the resources for liquidity control, to use them effectively and to take the right decisions in good time.

About Jörg Krbetz

Jörg Krbetz is a management consultant with many years of experience in various senior positions in finance. Among other things, he restructured the finance department and controlling at a listed real estate company and introduced various IT tools, from SAP through to property management programs. He has been friends with the COMMITLY team for many years.

Credits: Photo by riccardo oliva on Unsplash