Maintain a Positive Cash-flow or Risk Your Construction Project

Aastha A

The Cover!

One of the most important aspects of RERA is that it has made it mandatory for developers to deposit 70 percent of payments received from the sale in the escrow account. This provision might be a boon for consumers but it has impacted the cash flow management of the developers in a big way.

Developers are now limited to receive an advance from consumers and are also restricted in withdrawing any money before the accomplishment of milestones. 

Let us understand the concept of cash flow and its relevance to the real estate industry. Cash flow is a relatively simple term that means the amount of money (cash and cash-equivalents) being transferred in and out of a business 

Positive cash flow means that the net balance of the cash flow statement of a business over a given period is greater than zero. This implies that the company is adding to its cash reserves, allowing it to reinvest in the company, paying out money to shareholders, or settling future debt payments. 

Positive cash flow in real estate 

When it comes to real estate, positive cash flow means the amount of money coming from an investment exceeds the amount of money needed to operate it. Let us understand with the help of an example.

For example, you buy a commercial real estate property worth 1 crore rupees which pays a rental income of Rs. 50,000 per month whereas the expenses (tax deductions and depreciation) are only 10,000 per month. In this case, the positive cash flow in your hand is 40,000 per month or Rs. 4,80,000 annually.

If you are a real estate developer, it is very important to choose your properties very carefully so that it reaps the highest rewards.

Impact of positive cash flow for real estate developers 

Every real estate developer must understand the concept and maintain a positive cash flow. The cash flow is the lifeblood of any commercial construction project as it can help procure construction material, pay salaries, fund new projects and finance other important day-to-day operations of a company. In simple terms, a positive cash flow keeps your construction project alive.

It is important to note that a positive cash flow helps to maintain the supply chain and any project might fail because of a lack of consistent funds throughout the life of the project. Let us understand this with the help of an example. A real estate developer XYZ ltd. starts construction of his project. The project is finished 50 percent and the contractor has exhausted all the funds. The contractor orders cement, bricks, steel for completion of the remaining project but has not received money from the developer for the same yet. The developer had applied for a loan but it hasn’t been sanctioned by the bank. The developer has no other source of money and the construction needs to be stopped until the bank sanctions the loan. This is a classic example of cash flow mismanagement. 

Let us now understand ways how to maintain a positive cash flow

  1. Calculate the profitability and cash flow before entering the venture:

It is extremely important to calculate and understand the profitability before entering any venture. This can be done by conducting the cash flow feasibility before starting the construction. 

A real estate developer should take into consideration points like

  • How much work will be completed each week or month, 
  • Calculate how much money he would be paying to the vendors to know cash availability at every stage 
  • Compare planned with actual receipts so that he can make better forecasts in the future.
  1. Negotiate contract terms: Negotiation of price allows you to make sure that the payment terms are in the best interest of the company. Quantities of each material should be pre-determined and should be purchased in bulk to avail maximum discounts. 
  1. Use cash to your advantage: Cash is the most liquid option and payment in cash gives you a chance to negotiate the terms of the contract. In certain cases, you get steep discounts when you offer cash as a mode of payment 
  1. Compare different suppliers: Comparing different suppliers including architect, designer, and contractors gives you the best deal and save company’s cash.
  1. Sending automated invoices immediately and accepting electronic payments: Sending invoices to people ahead of time allows them to pay early and additional cash is generated earlier. Accepting electronic payments is also another strategy that increases the potential of cash flow. 
  1. Training the project manager on cash flow management: While hiring a manager, you should hire a manager who is skilled in cash flow management, negotiation, organization, and financial management. Another effective strategy is to give incentives to managers based on cash flow performance. 

The strategies mentioned aforesaid are only a handful and any property consultancy expert can lay out a proper cash flow management plan for the entire project. By now, you must have understood that cash flow is one of the most important factors in construction firms. Roodland Capital has expertise in providing loans against property, construction finance, builder finance, commercial property loan, and providing loans against Industrial property. 

We also have expertise in providing financial consultancy, conducting cash flow market research, sensitivity analysis, project feasibility, financial feasibility, risk management, etc.

If you have any questions or queries with regards to real estate or finance, our residential and financial experts are always there to help and guide you. Do mail us all your queries at info@roodland.com. Roodland community is dedicated to regularly educate our customers and make them aware of their rights. Roodland makes your dream come true.

close

Subscribe To Our Newsletters

We don’t spam! Read our [link]privacy policy[/link] for more info.

SUBSCRIBE TO OUR NEWSLETTER

To be updated with all the latest blogs, news and special announcements.