Your business is likely growing if you’re in the real estate business. And if so, congratulations! But as any entrepreneur knows, growth often brings financial and otherwise challenges. Building a cash buffer is one way to keep up with your growing business. This approach is simple: You don’t want to run out of money before you need it (or before an opportunity arises). So how do you do that? Here’s how:
Build your cash cushion over time
- Build your cash cushion over time.
- Don’t try to build it all at once.
- Don’t try to build it all in a year.
- Don’t try to build it all in 5 years or ten years, either!
Figure out what your minimum account balance needs to be.
Once you’ve got a feel for how much money your business is currently making, it’s time to figure out your minimum account balance.
The first step in determining what that number should be is getting a feel for how much money you need to run your business.
This can mean looking at any of these factors:
- How much do you pay out in payroll and other expenses each month? (If this number changes significantly from one month to the next, it could mean that there may be more than one cause for concern.)
- How much does the company pay itself in dividends or share repurchases? Suppose their dividend payout has remained constant over time, but their share count has fluctuated wildly due to acquisitions or IPOs. In that case, this could mean trouble ahead if they decide not to take advantage of those opportunities in the future.
Track all business cash flow.
Tracking cash flow is an important part of running your real estate business. Cash flow is the lifeblood of your business and can be defined as the difference between the money you make and the money you spend. It’s also a measure of liquidity—your ability to pay bills and satisfy debt obligations to meet short-term needs, including those related to employees’ salaries or rent payments (if applicable).
Cash flow is also an important metric for investors: The higher your cash flow, the more likely they’ll want to invest in or buy out your property later.
Open up a separate business checking account.
A separate business checking account is important for managing cash flow. It’s a good idea to open one up, especially if you’re starting your real estate business and don’t have much money yet.
You can use this account to pay bills and make payments on behalf of the company, as well as for things like employee wages or contractors’ fees. You can also use this account to pay taxes—you’ll need it if you have employees or contractors who receive their income from outside sources (such as commissions).
It’s also helpful if you keep track of all your expenses while they’re still coming in so that they don’t pile up during tax season when everyone is focused on getting their returns done quickly!
Establish a line of credit.
One of the most important things you can do to build up your cash buffer is to establish a line of credit. A line of credit is like an overdraft at your bank, except instead of taking money from your account each month, it allows you to borrow money from the lender and pay back what you owe them when they want their money back (usually within 30 days).
A line of credit works best with businesses needing short-term loans or seasonal demands like construction companies or landscapers. Think about how much time and effort goes into building up cash flow for these types of businesses—and how much more difficult it would be if they had no way to get their hands on extra funds when needed. That’s why establishing a line of credit is important in growing this part of your business!
Pay yourself first.
- Pay yourself first. This can be a hard concept, especially if you’re used to being an “everyman.” But there’s no denying that it’s one of the most important things you can do for your business’s health and success.
- Pay yourself first so that when you’re fully funded, suddenly everything else becomes possible: vacations, health insurance (or possibly even retirement), and more!
Prepare for the unexpected.
The best way to prepare for the unexpected is by having a cash buffer. A cash buffer is a money you can use in case of an emergency, like when your buyer walks away from their contract because they don’t want to pay all their closing costs or if you have to go into debt to pay off your vendors. This money will allow you to avoid hiccups along the way and give yourself time so that everything goes smoothly at closing.
Don’t Dip Into the Cash Buffer for Every Little Thing (or Anything!)
It would help if you never used the cash buffer for everyday expenses. For example, if you have a $500 monthly mortgage payment and a $500 car insurance bill, then it’s not wise to dip into your cash buffer to pay those bills every month—you should be able to afford those expenses out of pocket.
Similarly, don’t use your cash buffer just because an event is coming up that costs money: if an important event or party is coming up where people will be spending money on food or drinks at the bar (or whatever), then, by all means, let them contribute towards it! But don’t spend money from your budget so that someone can attend something that may cost less than what they could pay out of pocket alone.
Benefits of a cash buffer
- You can avoid having to borrow money. Cash buffers are a great way to ensure that you have enough cash on hand, so you don’t have to go into debt or sell your principal asset if the market changes.
- You won’t have to take out another loan. Suppose all goes well and your business continues growing, then one day. In that case, it might be time for you and your family (if applicable) to buy an investment property for that particular asset class—and another one—to grow even further over time. However, when this happens, there isn’t enough money readily available within the business because too much has been spent on other things like new equipment, renovations, etcetera…
A cash buffer is one of the most valuable tools in your real estate business. It ensures that you are always ready to take on new opportunities and handle unexpected situations without worrying about running out of money. And if you’re looking for some ideas about how to build up a cash buffer, we’ve got them here! Visit our website, Commission Express National for more information.