Cash Flow Management In Real Estate Business: Avoiding Mismatch

In this enlightening piece, Debo Adejana states how business owners especially in real estate can manage cash flow by simply avoiding mismatch.

Businesses stand the test of time or survive not because they make money but because there is cash to manage and keep the business running. Invariably a business that is not making profits but has good cash flow can remain afloat till they find out why they seem not to be in business, there after re-strategize and draw out a more concrete action plan.

That is why they say cash is key. However a business that is always making money or having good returns on investment but seems always low on cash faces the likelihood of an untimely death.

Cash is very vital in every human avocation or business and real estate is no different. As a real estate developer, you must be able to manage your cash flow owing to the fact that one of the major headaches of cash flow management is mismatch.

Taking a cue from the banking sector, one of the challenges they face is on the issue of lending money to people. The usual norm is that they hardly lend money and also give the impression that they don’t have what you need. You may be wondering “how on earth is it possible that banks can be low on cash?” the answer is not far-fetched;

Basically the kind of money available in Nigeria banks is short term. What that implies is that Nigerians don’t have any means of money that is long term.

A lot of Nigerians place money in banks to mature for 30 days, 60 days and 90 days, hardly do they place it for a year. Even if it’s going to get long term, it can’t be more than 2 years.

Due to the above premise, it will be quite difficult for those in the real sector to borrow money from banks for their real investments because the banks need money that stays 5, 10 or 20 years in the system so has to avert mismatch.

Though this occurrence is not peculiar to Nigeria alone, it is a different scenario in the developed countries of the world where long term funds are obtained from raising bonds, access to pension funds and Insurance. Taking a critical look at the aspect of insurance, suffice to say it is quite a bigger and more profitable business in these developed countries. In fact, Insurance money is more long term than savings account in a typical Nigeria bank.

These methods can also be adopted here to secure long term funds and therefore, begin to lend to the real estate sector.

Yes! banks can be broke as stated in the course of this article, hence, it shouldn’t come as a shock when a bank refuses to lend you money simply because they are broke. They can’t lend you money that is five or ten years more than they can afford except they want to entirely go bankrupt and consequently put their business on the line. That’s more like a dead end!

What happens when the people who vested their trust in them by putting money under their auspices on a short term basis come asking for their money. I guess it’s clear now why banks find it difficult to lend money.

Again , if they lend money to people on a long term they won’t  be able to meet up with their obligation when their customers come knocking and consequently, there will be a mismatch. News will spread like wildfire that the bank in question has gone broke and that will definitely spell doom for their business. And like they say, one man’s pain is another man’s gain; this will open new doors of opportunities for their closest competitors in the banking business, call it “survival of the fittest”

Now, this picture has seen in the banking sector is also applicable in real estate sector. For instance, in landed transactions that people do, imagine you are selling a land to people and they are asked to pay in installments, then along the line you promise them infrastructure. However, in the typical bottom of the pyramid sites and samples, infrastructure comes after. But because you are gunning for prospects and you probably want to create an impression as regards your real estate project, business sense demands that you try to do as much as possible to improve the look and feel of the estate/project for people to be able to commit money into.

Albeit, things can get rather dicey if you don’t have the resources available to do that extra work. That will mean dipping your hand into money paid for just land thereby shooting yourself in the leg. The implication of this is that you will be spending more money on infrastructure and invariably, you may not have enough money to complete other things such as documentation. Worse still, there won’t be enough land to give to people as at when due. Then, what happens to the money you collected from the unsuspecting people; money that has gone down with your other projects with the hope that it will fetch you returns as soon as possible? What happens when people stop coming up for infrastructure or they are not paying infrastructure as expected? These are red flags and can portend danger for you. News will go round about your inability to live up to your billings and your under-performance will become a news item for the general public. It will only be a matter of time before your business nosedives into an abyss.

A typical avenue where people mismatch is in the area of using money that is meant for Plan A to run Plan B. You would have succeeded in mismatching when you divert resources meant for land and purchase into infrastructure as stated earlier.

Building houses is good business when you can build in a location where you will be able to sell the house in good time. However, if it so happens that you build in a place where selling the building will be a major challenge, then you may just have recorded a mismatch.

For instance, you erect a number of structures yet in 7-8 years you are not able to sell a single unit or sell as much as you’ve built, that means you only succeeded in holding up other people’s money for donkey years. Consequently, If you cannot deliver on the purposes for which you’ve collected their money, your business can stagnate and die. Anyone in business must hold on to this fact strongly; mismatch is bad for business not when there is no steady cash flow.

Conclusively, to prevent mismatch, have a good accounting system. This will ensure that you are able to determine the income you’ve made and how much of it you want to plough into giving a face lift to your estate, property or development.

Debo Adejana
MD/CEO Realty Point Ltd