Sure, hiring a plumber, collecting rent, putting out tenant fires — primarily figurative — and basking in the financial independence that real estate investing affords you are key facets of day to day operations of owning a property. But the often forgotten, sometimes more important, element about real estate investing is cash management.
There is more that meets the eye with property management, and if you are not employing a cash management strategy, odds are you are setting yourself and your investment up for failure. So, we're highlighting just a few cash management tips and tricks, so you can continue to "bask" in what your money can do for you.
Why Having an Effective Cash Management Strategy Matters
Cash management inefficiencies are the primary killer of positive cash flow for real estate investors and small business owners. Having a strategy to manage it all provides so many benefits, you'll be wondering why you didn't invest sooner. Those benefits include:
Manual cash management processes that have multiple touchpoints of cash-handling leave too much room for error. Room for theft, room for miscounting, room for lost data, and room for lost sales. Having a cash management strategy in place acts as your second set of eyes — with 20/20 vision — on all property transactions, so the risk of lost future profits.
A Partner in (non)Crime
Think of a cash management strategy as the business partner / angel investor you never knew you needed. They are there to help you save, make money, implement new ideas and marketing initiatives, and build customer loyalty through seamless customer service. They also still allow you to be your own boss, asking for nothing in return.
Real estate investors and property managers benefit from cash management strategies that streamline all of your properties' needs, wants, and operations. For example, having one cash management platform like a digital rental app allows you to collect timely rent payments, pay utility bills, instantly message with tenants about any problems that arise, and provide virtual tours to prospective tenants. All from the easy access of your mobile device and single software.
In summary, a cash management strategy ensures you are optimizing your property's working capital by:
- Minimizing extra cash on hand;
- Accurately balancing cash inflows and outflows;
- Maximizing return on your real estate investment and value creation; and
- Maintaining sufficient working capital to cover current financial obligations and any unexpected costs.
The benefits to having an effective cash management strategy outweigh any costs.
Best Cash Management Strategies
Cash management strategies are not a one size fit all. They also can overlap — a.k.a. you can have more than one implemented. Let's take a look at some of your strategy options.
1. Invest in a Software Solution
Every business and entrepreneur should be using technology to collect cash. Automated cash management systems streamline all business transactions to increase business efficiency, improve cash flow, and reduce costs. Being able to keep digital record of all rent collections, utility invoices, property repairs, and vendor payments in one place makes for seamless operations, happy tenants, and a happy landlord.
2. Be a Proactive Invoicer and Invoicee
Gone are the days of paying vendors via check in the mail and weeks in advance, hoping it gets there before burning a vendor bridge or picking up a late fee. And gone are the days of you trying to track down tenant and vendor payments, just to not have access to said funds until weeks past advance. Streamlined cash management gets invoices into your clients' hands faster and money in your bank account sooner.
3. Don't Be Afraid to Finance (or Refinance)
Short-term and long-term financing can be an effective cash management strategy for when you're looking for a quick influx of cash or wanting to take advantage of an investment opportunity. Short-term financing options like a business line of credit provides working capital over an extended period of time. In the real estate realm, they are commonly used for commercial renovation projects, ranging from buying new appliances to paying designers and contractors. In addition to providing quick cash, refinancing a loan can also give you more favorable loan terms, like a better interest rate and lower monthly payments.
Whether you're looking to attract new tenants, add property features and amenities, or cover operational expenses, a lender will find the financing solution best suited to you through an underwriting process.
4. Balance Rewards and Retributions
This cash management strategy looks at two competing elements.
Crafting a clear and thorough collection policy is crucial to monitoring cash flow. That means having formal payment terms and policies in place for late payment penalties, and revisiting and updating as needed. Your tenants, staff, and vendors need to have the most current collection policy distributed to them at all times.
On the other hand, you can offer discounts for early payments. Discounts can help you reap more cash, more quickly, even though you’re receiving a little less from each individual taking advantage of the discount. Sacrificing 5% - 10% of an invoice to get the cash in hand within a shorter time frame is well worth it if it prevents you from having to take out a short-term loan and pay hefty interest fees to cover the losses due to tardiness.
5. Manage Inventory Effectively
Effective inventory management basically means limiting the amount of dollars tied up in inventory, while making sure not to lose a potential sale. In the case of real estate investors, your "inventory" is your properties. Vacant properties and half-finished projects are not generating income for your business, they are severely impacting it. You need to keep track of lease end dates and ongoing projects, so you can limit the money lost during tenant turnover and empty residences. Having an automated system for this would be especially beneficial for real estate investors who own multiple multi-family units.
You can use these cash management strategies to properly forecast your cash needs, speed up the cash collection process, and ensure you have the cash on-hand in order to effectively and efficiently operate your property. If you are looking for another partner in (non)crime as you navigate your cash management journey, talk with one of our experienced business professionals today.