A real estate agency is like any other business. You need to maintain a positive cash flow to grow. These clever accounting tricks will help you to do just that.
Poor cash flow will damage any business. In a real estate agency, it may cause issues with payment to agents. Plus, it could limit how you advertise clients’ properties or how you act on their behalf as buyers.
It can even affect your registration, as Shane Snellgrove discovered:
In 2014, cash flow issues caused Shane Snellgrove’s real estate agency to declare bankruptcy.
As a result, his registration got cancelled. Unfortunately, Snellgrove continued working as an unlicensed land agent. This left him facing a further penalty of $20,000. Plus, it placed all who worked with him in this capacity at risk.
That’s not a situation that any real estate agent wants to find themselves in. Of course, most agents won’t continue working without a license. But the best way to avoid even having to consider it is to take care of your agency’s cash flow.
Keep it positive and you won’t have any problems.
That’s where these accounting tips and tricks come in. Leverage all of them to keep your agency in good financial standing.
Tip #1 – Develop a Turnaround Plan
A turnaround plan is the only option if your agency is already in dire straits. Such was the case with Real EstateCo:
Based in the United States, Real EstateCo focuses on the high-end apartment market. Another company purchased it on the condition that it could sell certain assets to reduce its debts.
Then, the American real estate bubble burst.
House prices plummeted, which massively reduced the agency’s cash flow. Now, they needed to find a solution to improve cash flow again so the sale could go through.
The agency created a turnaround plan that included:
A full review of all of its working capital programs.
Restructuring of its balance sheets and related forecasts for cash flow.
Streamlining business operations to reduce unnecessary costs.
The use of new tools to help them to manage cash flow.
This helped the agency to turn things around and complete its sale.
However, the techniques it used aren’t limited to agencies in crisis. Following these steps could help you to prevent such cash flow issues in the first place.
Tip #2 – Choose the Right Business Structure
You can structure your agency in a number of ways, including:
Each faces different tax liabilities. For example, a sole trader must pay tax on the agency’s earnings at their own income tax rate. However, a company will pay 27.5%, which rises to 30% if the annual turnover goes over $2 million.
This means you may find that creating a company is a better choice if your personal income tax rate is higher than 30%.
However, as a company, you don’t benefit from the 50% Capital Gains Tax Discount. This applies to any asset that you sell after owning it for more than 12 months.
If you’re operating a trust, each beneficiary gets charged at their own income tax rate. However, you likely won’t be able to keep funds in the trust to enable the growth of the business.
The point is that your business structure affects how cash flows through your business. Make the right choice for your agency based on its revenue.
Tip #3 – Consider Different Financing Options for Acquiring Assets
You have several options open to you when using finance to acquire assets for your business. Typically, you’ll use one of the following two types of finance:
- Chattel Mortgage – This allows you to buy the asset via a secured loan.
- Operating Lease – Create a rental agreement that allows you to lease the asset for as long as you need it.
Each comes with its own tax and accounting implications. In regards to cash flow, the choice depends on how you’ll use the asset.
If you use a loan to buy the asset, you’ll have to make repayments on that loan as per the terms of the agreement. However, you also own the asset, which may mean you can claim depreciation on it.
When leasing an asset, you’re still paying a fee as part of an agreement. However, you can’t claim depreciation. The upside is that you stop paying anything once you no longer need the asset and the agreement gets terminated.
As a general rule of thumb, an operating lease is best for an asset that you’ll only need for a short period. You may pay more than you would with a loan. However, these payments will not last as long.
Loans work best when you’re looking to secure an asset that you’ll use for a long time.
Tip #4 – Outsource Your Bookkeeping
Keeping your bookkeeping in-house may seem like the best option at first. It allows you to have complete control over your financials so you can see what’s happening with cash flow.
That’s the theory.
In practice, many real estate agencies struggle to keep up with the books. With so much focus placed on transactions, marketing, and providing services, the books often get forgotten about.
And when you come to do them, you have to sort through a mess of paperwork. That costs the business time that you could spend on generating more income. Plus, putting the task off means you’re not benefiting from having a keen eye on your cash flow.
That’s why outsourcing is such a great solution.
It gives you access to professionals who know what to look for when it comes to improving cash flow. You get accurate and timely reports that you can take action on. Plus, you free up your agents’ time so they can work with clients.
Take Control of Your Agency’s Cash Flow
As a real estate agent, your primary focus is on providing the best possible services to your clients.
The issue is that cash flow can become an issue. A lack of focus on your business and its processes can cause all sorts of problems.
The tips shared in this article will help you to take control. And if you need help implementing them, Bottrell Business Consultants can step in.
To find out how we can help your real estate agency manage its cash flow, call us on 02 49 336 888. We’ll arrange a free consultation to discuss your agency and any cash flow worries that you have.