How can property developers stay on track in turbulent times?
In an uncertain real estate market, where real estate developments are under pressure from slowing sales rates, delayed construction timelines and worsening defaults—properly managing your project’s cash flow through the entire life cycle is critical.
As projects in the design phase are placed on hold, there is a level of volatility not seen in the real estate market for some time as all stakeholders within the industry are affected. For developers with projects already active, the ability to continue building and complete projects on time and on budget is increasingly at risk.
Project revenues are likely to slow during this period of significant disruption with increased pressure on cash flow requirements. The industry is now facing a greater probability of default on residential settlements, a significant change to proposed commercial lease terms, delayed or deferred loan pay-downs and reduced security from the banks.
With the current cycle like this, it’s critical to accurately manage your real estate development cash flow. So, what can you do?
- Create a solid workflow within your development team
Members of your development team doesn’t just include the CEO, Development Manager and Project Manager, you should also always have your finance team involved from the project inception. By involving your finance team early, you can give them a sense of the project so they can develop a thorough understanding of the development budget and the critical time frames the project must adhere to.
From the project inception, work with your finance team to develop a strict control of your cost codes for billing and chart of accounts within the accounting system. This will help ensure you have an accurate understanding of project costs but also a reliable structure to rely on for future projects.
Once you’ve set your feasibility as the benchmark budget for the project, make sure there’s regular communication inside your Project Control Group meetings (PCGs) between finance and the construction / development team when reviewing your overall project budget and reviewing cash flow forecasts each month.
- Focus on your cash flow forecast
As the invoices start to be processed, remain vigilant and review your actual costs every month. Understanding how much you’ve spent compared to how much you’ve got to spend is an important element of cost control.
But it’s not enough to consider only costs incurred, successful developers focus upon future costs and potential risks.
If you start to recognise that your project is at risk, and costs, revenues or timelines are going to be delayed, having an open communication with your team will not only allow you to understand the impact of those variances on your cash flow throughout the life of the project but also how to manage those variances and ensure profitability remains within the project.
- It’s not all about costs
Being able to understand and manage your project revenue is just as important. What if your presale revenue didn’t exceed the projected timeframe? What if your revenue didn’t exceed the expected goal? What if at the end of the project 50% of your stock remains unsold even though it presold?
Tracking your revenue with your finance team and the rate of sales with your sales team will ensure that you gain a full understanding of how the project is actually performing over the time frame that you expected it. Whilst a project maybe highly successful at the presales stage, they may fail when it comes to settlements leaving developers with unsold stock and eroding profit margins.
Watch this quick video below to see firsthand how ARGUS EstateMaster can help you manage project cash flow, report on variances and understand your project finances.