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.
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.
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.
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
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 email@example.com. Roodland community is dedicated to regularly educate our customers and make them aware of their rights. Roodland makes your dream come true.