The Iran war, sharply rising mortgage rates and soaring gasoline prices have made the spring shopping season one of the most difficult in years.
Many real estate agents and brokers are already heading into 2025 with a low income year, and current events have taken an even greater toll this year. If your car transmission fails, you get sick, or some other disaster hits you while you’re struggling to get by, what can you do to avoid the devastating effects of a cash flow crisis?
A major challenge that every company faces is managing cash flow. Cash flow is what’s left after deducting all the deductions needed to run your business, such as car expenses, computer equipment, marketing, accounting, and software.
Another way to look at cash flow is the funds available to support the operational needs of your business. Even if you are profitable at the end of the year, cash flow may still be tight. This is especially common in the real estate industry, where once you receive one big check, it can be months before you receive another.
Cash flow is very important, without it your business will grind to a halt.
5 steps to avoid a cash flow crisis
To avoid cash flow crisis ambush attacks, follow these steps:
1. Build a reserve
The easiest way to avoid a cash flow crisis ambush is to have cash on hand. Ideally, you should have at least six months’ worth of income in the bank to cover all your expenses. In reality, you should have separate spares for home and work. To increase your reserves, start allocating a portion of every fee check to your cash reserves.
2. Make exploration time sacred
The main reason why agents experience a cash flow crisis is because they are unable to secure regular leads. If you’re facing a cash flow crisis, get busy calling past customers, calling owners of expired properties, holding open houses during the week, and doing whatever else has gotten you leads in the past. In other words, put yourself in front of as many potential customers as possible.
3. Monitor and reduce market hours
Over the past 12 months, how long did it take on average for each listing to sell? How many homes did buyers have to show before they bought? If you don’t know the answers to these questions, it’s important to start tracking this information now.
You could sell exactly the same number of properties you sold last year, but if you cut your time on the market and the number of homes you offer to buyers in half, your profitability (the money you keep) will increase dramatically.
4. Calculating opportunity costs
Marketing your property and taking buyers to see your property is expensive. For example, if you spend time acquiring a buyer, your “opportunity cost” is all the other activities you choose not to do that could have generated income. Therefore, it is always wise to ask, “Will it be in the best interest of my time to work with this buyer or seller or participate in this activity?”
A slightly different question is, “What should I choose to get the most return for the least amount of investment time?”
5. Create a percentage budget
Does your business have a budget? If so, is it fixed or a percentage budget?
A fixed budget means that you allocate a specific amount of money to each item. In some cases, budget items are fixed, such as board membership and errors and omissions insurance, but some items are not. Examples include marketing costs, advertising costs, and open house costs.
With a percentage budget, you allocate only a certain percentage of your income to these expenses. In other words, if you allocate 10% of your total sales revenue to marketing and earn $2,000, you should limit your marketing expenses to $200 this month. If you earn $8,000 this month, you have $800 to spend.
This approach allows you to control your cash flow while easily adapting to fluctuations in income.
How to deal with a cash flow crisis
1. Pay with cash
Paying for your expenses with a credit card may be convenient, but it can also be a problem-prone method. A better option is to use a debit card or check. Once you have no money in your account, stop spending until it’s gone.
2. Be careful with credit cards
If you must use a credit card, do your best to pay off your balance in full each month. If you don’t, you’ll end up paying an extra 12 to 29 percent a year in credit card interest. This is the least effective way to deal with a crisis.
If you must borrow, consider opening a business line of credit. Many local commercial banks and some credit unions will be happy to work with you if you have good credit and are willing to have the fee check or credit card billed through your financial institution.
3. Be your own bank
Do you have money in your retirement accounts? If so, liquidating them could cost you a lot of money. A better approach is to borrow against the account.
For example, one of my friends keeps some money in an LLC that holds stock. Instead of selling stocks when he needed money, he borrowed money at 6 percent interest. Since he had two other partners, he paid 4 percent of the loan to them and the remaining 2 percent to himself.
Be sure to check with your CPA or financial advisor about the best route for your personal situation.
With a little planning and foresight, you can avoid tight cash flow for your business and keep your fee income strong throughout the year.
Talk to your CPA, pay in cash or use a debit card if possible, avoid impulse purchases, and look for ways to reduce costs with shopping companies for cell phones, insurance, and other services available at low rates.
