Property and Construction
Expansion & Improvement,
To run your property development business effectively you need enough ready cash in the business to keep all your sites funded and ticking over. And that means having a very precise level of control over the cashflow and cash forecasting for each of your developments.
In this property development series we’ve already looked at the need for a clear business strategy, as well as understanding the key elements of VAT.
In this final part, we focus on how to retain enough liquid cash in your property development business. Daniel Morgan explains how projecting your costs is the key to achieving the ideal positive cashflow position.
The cashflow challenge for property developers
Understanding what cashflow is and how it affects your business can be complicated if you’re not financially minded or trained in the basics of accounting. In the most simple terms, cashflow is all about balancing the cash inflows (your sales income, revenues and most likely with developments, your debt and equity finance) against your cash outflows (your costs, expenses and overheads) to make sure there’s always the required amount of cash in the company.
With most standard business set-ups, there’s a regular pipeline of money coming in, balanced against money going out. But with a property development business there will be long periods of cash outflow on costs and overheads, with large cash inflows only happening at certain irregular points when you sell a property.
A careful plan for cashflow and funding is required to balance these out, to enable the business to trade. Cash is king, so this lack of cashflow can become a big issue for developers.
Working out your costs and budgets
When you’re getting the initial funding for a project in place, it’s important to also factor in the costs and overheads. Banks, finance providers and investors will want to see cashflow projections and a detailed business plan before they lend any money to fund the development.
So this process of working through your cash outflows is absolutely critical to getting the development off the ground.
Some key areas of cash expenditure to consider will include:
Monthly bills for running the business – including things like office rent, utility bills and payroll costs for any employees you’ve taken on.
Site costs and materials – including the hire of plant and equipment, plus the buying of the raw materials and tools needed to carry out the development or building work.
Contractor invoices and fees – to cover payments to contractors, builders and other trades that will be working on each of your projects.
All these costs must be included and planned out in your cashflow projections – forming the basis for an overriding cash budget for each site.
Helping you factor in the right costs
Drilling down into the finances of each site to work out your costs and overheads can become a time-consuming and fiddly task – and something where property development experience is a huge benefit.
Partnering with a property accountant who has that knowledge and expertise makes a real difference, helping you to produce accurate cost estimates, clearer financial projections and site budgets that provide a realistic template for your cashflow.
We typically run a three-year cash-flow projection for your property development business, so you’re on top of your costs. And when you look at adding new sites, we’ll update that projection to give you transparency on whether there’s sufficient cashflow to run each new development across that three-year period.
Working with a part-time FD
Many development businesses won’t be of a size where you can justify having a full-time finance director role in-house. But partnering with a part-time outsourced FD adds real value.
Our outsourced FD should look forward, highlight any issues and help plan ahead. The key functions should be:
Produce regular management accounts – so you have the key numbers and cost data at your fingertips for each of your sites and projects.
Run forecasts of your main KPIs – so you have projections of your key performance indicators for financial elements like cashflow, sales revenues, gross margins and profitability – using custom spreadsheets and the latest in cloud reporting tools.
Have quarterly meetings with your management team –run through the financials with you and your board and keep you in full control of your finances.
At each stage of the development, an FD is there to keep you on track and make sure you’re getting the best possible return on each project.
Helping you meet the cashflow challenge
Your challenge, as a developer, is to stay in control of costs and overheads, factor in the ramifications of any taking on any new sites and developments, and curate the long-term success of your business – without doing the whole thing on a wing and a prayer.
What we do is remove the uncertainty and short-term outlook, and help you get real control over the financial business of your development business.
Talk to one of our property accountants about taking control of your cashflow.