Budgeting for your Real Estate Business
Another of the best practices highlighted at AREA’s Best Practices for Real Estate 2015, is the importance of Budgeting and the management of income and expenditure to stay within the Budget.
Cash flow is the life blood of any business, so much so, that it is possible for a company to be making a profit but face bankruptcy because of a lack of availability of cash. Therefore, it is vitally important for your Real Estate Business, that you adopt measures to ensure that the business has access to cash at all times.
This is done by planning and forecasting the flow of cash into and out of the business. The cash flow into the business is described as the income of the business and the flow of cash out of the business is the expenditure. The planning and forecasting of the income and expenditure is called the budget.
At the beginning of every business cycle, be it, the year, the month or the week, a best practice is, creating and following a properly prepared budget. By attempting to stay within the confines of the budget, a business is better able to make decisions on expenditures. If the company is not realizing the budgeted income, then expenditures will have to be curtailed to ensure adequate availability of cash.
Budgeting is one for the most important tools of modern business practice. It’s history is probably as old as man on earth and there are records in the Middle East of budgeting tables in the Persian and Roman Empires. But, it is not until the nineteenth century. that modern day budgetary practice, with the balance sheet and cash flow, was fully developed. Probably the French were the first to develop modern day budgetary practice, as there are detailed records of Napoleon’s military budgets that are surprisingly modern in appearance.
The key to god budgeting is proper forecasting. This starts with anticipating, as accurately as possible, the flow of cash into the business for the cycle ahead. Since all budgeting starts with income, it is advisable to be conservative in forecasting it. Only when we have a fairly sound, with minimum risks, forecasts of anticipated income, can we then proceed to plan or budget the expenditure. This balancing of income and expenditure is crucial as we move through the business cycle.
If there is anticipated shortfall of cash flow in your budget, your real estate practice would have to seek additional income, most probably through borrowing or shareholder investment. The merits of these alternatives are beyond the scope of this article, but suffice to say, that these decisions can have a structural impact on your business.
Budgets are not cast in stone, however, since they are based on forecasts, and even the best forecasts have a margin of error. The most common variances to budget are a shortfall or delay in income and unplanned expenditure. But having a budget, enables you to spot the variance quickly and make adjustments. Without a budget, one is at the risk of spotting these variances too late, with adverse consequences to your real estate practice.
We hope we have made you aware of the value of a budget and convinced you to adopt it as one of your best practices, and hopefully, in the future, you would not comment like George W. Bush, who quipped, “It’s clearly a budget. It’s got a lot of numbers in it.”