Managing the financial health of your property business can be a challenge. Whether you’re the developer, a construction company or a lead contractor, costs and overheads can be high while income into the business can be slow. So cashflow is an ever-present worry – adding to your stress as an owner.
With the benefits of forecasting, your property business can see further down the financial path, allowing you to project your numbers forward a month, a quarter, or even two years down the line.
While no one has a ‘crystal ball’, a detailed cashflow forecasting is essential in helping you balance those finances effectively.
Sam Berry, Partner at Haines Watts London, outlines the benefits of embracing a custom approach to forecasting, and the impact this could have in your property business.
The key financial challenges for property developers
While maintaining a healthy financial position can be challenging for any property business, it is enhanced dramatically for property developers.
With large upfront costs and income only landing on the sale of properties, compounded by the pressures of external financing, the need to understand costs and more importantly the timing of these costs is vital.
Some of the key challenges that are currently affecting our property development clients include:
The cost of finance
Even our most cash rich clients require cash borrowing to complete projects.
Good and effective borrowing is becoming harder to find, with GDV pricing being knocked down by the banks and the interest and penalties increasing. It’s extremely important to model the interest on a monthly basis, with potential overruns including the impact of additional interest and penalties.
Site costs and overruns
To run a successful property project you need to build quickly and efficiently. This unfortunately means the costs rack up just as quickly!
Prior to the commencement of projects the costs will be detailed, however even the most experienced developers come across challenges that will affect timings and costs. It is important to factor in a contingency that the lender is happy with, plan for when additional costs are expected and understand when lender will fund these, if they will at all.
The financial forecast will need to be updated regularly to ensure you understand whether there are any shortfalls, the amount and timings of these.
Wider economic implications
There has been a downturn in construction due to Brexit uncertainty. Changes in the economy and the market can have a huge impact on the running and profitability of your property developments.
We’ve already seen clients affected by labour shortages, increased cost of materials and GDV reductions. While this is something you may not be able to directly change, it is important to be prudent when modelling the impact on your projects and wider business.
Slow down of income and pipeline
With the economy currently stagnant, and teetering on the edge of recession, properties are taking longer to sell and prices may be reducing or staying flat. The pipeline of clients also seems to be slowing, resulting in reduced projects and overall profitability. It’s important to not only have an understanding on specific projects, but also the wider business implications.
The benefits of forecasting and reporting
How does forecasting feed into this cashflow situation? And what are the benefits for your overriding financial position, budgeting, planning and long-term profitability?
In essence, forecasting is about increasing your knowledge and understanding of each project. This includes the total costs, anticipated overruns, understanding the potential interest and penalties, the projected sales and when all these transactions will happen.
By looking forward and using the right forecasting tools, it is easy to understand why this can be so valuable to your business.
With regular forecasting built into your management information you can:
- See the future path of your finances
- Quickly flag up any cashflow gaps
- Take action that maximises cashflow
- Scenario-plan potential new projects
Providing bespoke custom forecasting
There are plenty of forecasting tools and apps out there on the market. These can be really useful for more basic forecasts, but with a certain level of property business, it’s important to have the flexibility and detail to be able to drill right down into every expense, overhead and cost centre.
The flexibility in most forecasting apps is just nowhere near good enough. So, when I’m working with a property business, I will generally develop a financial model myself.
To deliver the most effective forecasting, I will:
- Get to know your business and goals – so I understand the vision and scope behind your property business and can align our financial reporting and advice to your needs.
- Identify the key financial drivers in your model – so we can start financially modelling your business and pinning down the drivers to include in your forecasts.
- Tailor our property forecasting tool – creating a completely bespoke forecasting solution that can be updated, amended and flexed to meet your changing requirements.
- Provide you with regular custom forecasting – making financial forecasts a key part of your regular management information, so we keep on track with the numbers.
You can be confident that your forecasting is on point and will start delivering the medium and longer-term benefits of having this ‘crystal ball’ at your disposal.
Your financial management is more informed, your budgets are more realistic and your decision-making is based on solid foundations.
Delivering the best return from your projects
We specialise in working with owner-managed property businesses. We know the unpredictable nature of the property market and the challenges you face when delivering a healthy return.
With the benefits of robust and bespoke forecasting, regular management information and the support of an accountant who fully understands your sector, the sky is the limit!
Talk to one of our London property accountants about setting up bespoke forecasting or get in touch with me directly below.
Want to know more? Call us on 0207 025 4650 or email firstname.lastname@example.org