How to manage Cash Flow for you project
How to manage Cash Flow for you project
Until the wake of 2016, Real Estate sector in India was sought to be one of the most uncontrolled and unregulated industries . If one looks at the statistics, prior to 2016, there are innumerable cases pending in consumer forums and civil courts where the consumers are aggrieved by the poor cash management by the real estate developers, leading to the project failure or delay in passing over the possession. While the introduction of Real Estate Regulation Act, 2016 was enacted with an objective to make real estate a more regulated industry, poor cash flow management continues to be one of the major problems for most developers.
On speaking with a couple of stakeholders from the real estate industry, there are two major concerns surrounding the real estates — (i) adhering to delivery deadlines and (ii) efficient cash flow management.
While RERA seeks to attain the objective of managing the funds by the real estate developers, however one cannot ignore the limit the act has imposed on collecting advance from the buyers and restricts withdrawals from the projects, only on the basis of delivery milestones achieved. As one is aware, the act lays down a requisite that 70% of payments received are required to be used for the project expenses alone and should be maintained in a separate escrow account. Further, it is mandatory to take a sign off for withdrawals by an architect, an engineer and an accountant.
Thus, with advance collections falling short and a limit on withdrawal limits, cash flow management has become a prime concern for the major project developers. Despite three years of implementation of the act, many project developers still require to restructure thier current operating processes. In such a scenario, project management plays a vital key in developing the processes and allowing the developers to maintain a healthy cash flow. Here are five ways in which you can maintain cash flow without any compromises:
1. Future cash flow projection
While, most businesses usually predict costs at the very onset of every financial year, the same might be a little complicated for real estates. In real estates the degree of projects and prices change with time. However, an advance cash flow prediction would enable the developer an opportunity to assess a tentative value of expenses and gains for the future. One can opt to maintain a rough margin of 10–25%, to predict costs and make allocations accordingly. Such cash flow prediction will help you to safeguard funds at the time of contingency and not attract any violations under RERA.
2. Set your Goals for day sales outstanding
It is no secret that setting goals for oneself greatly increases chances of being successful.In a usual cycle, the average number of days to get paid in such projects is 30 to 90 day, post booking. You can make attempts to bring that down to 50 days and could make your payment cycle more effective. This can be done by raising immediate invoices, incentivizing immediate payments by offering discounts, having clear terms of understanding before entering into transactions, and checking credit reports of the investors and trying to renegotiate with the non-payers on different terms.
3. Quicker processing of change orders
Change orders are frequent in construction. They are perhaps the primary reason of delay in any project. Change orders not only require more time but also utilize much more money and resources than originally allocated. Bad weather conditions can further delay the process. Thus, it must be ensured that the change order must be processed immediately, instead of waiting for the project completion. This will ensure that the money is received at the right hour, which will have a positive impact on the cash flow.
4. Spreading out the costs
Another objective of RERA was to introduce financing into Indian real estate system. Unless a steep discount is received, a real estate company should use financing for purchasing supplies. Though this might come with interest, however, this will help in spreading out the costs and leave more cash in the business. In other advanced markets, real estate companies have been working in a similar fashion. The developers usually use financing avenues such as investor’s equity, joint ventures, loans or public fund raising or guarantees
5. Do not over/under bill
Certain project managers prefer over-billing. Over billing means that the invoice is raised for a higher value than the job completed as on date, to increase the cash flow. However, the cons of doing the same is that the cash flow towards the end of the project will be reduced substantially. On the other hand, under-billing would give a severe blow to the cash in the current ongoings. Thus, one must only bill as per the milestone achieved during a project.
6. Start Accepting Online/e-payments
Post demonetization, most people prefer paying online. However, real estate developers sometimes lack avenues to facilitate the same. By accepting e-payments, the payment will be received faster and increase the cash flow. This would provide more capital to be used for day to day operations, growth and payables.
7. Automate Invoices and send immediately
The trick to maximizing the cash flow potential is by ensuring that the invoices are sent ahead of time. The invoices should be automated and sent at the earliest so that the customers/vendors have enough time to arrange for the payment.
8. Change your payroll approach
Unlike most business, real estate has a completely different scenario when it comes to payment of the workers. Most workers are paid on a weekly/bi-weekly basis. This usually has an effect on the cash flow. Thus, it is advisable to hire a subcontractor instead who can be paid on a monthly basis. The sub-contractor would be the one responsible for weekly/bi-weekly payment of the workers, which would not affect the cash flow of the project.
9. Bargain and get the best prices
Every seller/supplier requires business. Thus, if you make them aware that you are shopping for the best offer, the supplier is likely to give you the best deal possible. Needless to say, by reducing your procurement costs, you will be increasing the cash flow in your business.
10. Include a development management fee
You can include a development management fee in your project, which will allow you to receive income during the project. For instance, the first mortgage construction finance provider will allow a periodic development management fee to be advanced from the loan as part of the professional fees. However, the same should be kept negotiable and at a reasonable price, reflecting the effort put in a project.
All these measures will contribute to create a stable cash flow for your business and reduce the trust deficit between you and your consumer and you and your investors. You must always bear in mind that real estate projects operate differently than most businesses and therefore different strategies are required to be implemented. Try to ensure that you are doing everything in your power to increase the pace of your receivables and you are good to go.