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Why Liquidity is Vital in the Real Estate Industry – Especially in Pandemic

Real estate industry


Why Liquidity is Vital in the Real Estate Industry – Especially in Pandemic

Real estate industry

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The phrase “cash is king” may be cliché, but it’s well-worn for a reason: In business, cash is the lifeblood that keeps your operation running. Just like your vehicle needs fuel to operate, your business needs a strong cash position to thrive. The degree to which you have cash readily available to run your business effectively is known as liquidity. 

When you have good liquidity, it means you have the working capital to cover your short-term expenses and debt obligations with the cash or other liquid assets you have on hand. It’s often measured as a quick ratio that compares your total current assets (i.e., cash and assets that can be quickly converted to cash, excluding inventory) to your total current liabilities. Lenders view the quick ratio as a key indicator of a business’s ability to meet its short-term obligations.

Every business needs good liquidity. But the real estate industry tends to need more liquidity than some sectors, partly because acquiring and developing new properties requires available cash. Real estate business owners typically use their balance sheets to assess their financial position and determine if they have the cash to make property investments or if they have enough reserves to weather an unexpected storm…like the COVID-19 pandemic.

Liquidity in Uncertain Times

Uncertainty can wreak havoc on your liquidity, and COVID-19 created uncertainty on an unprecedented scale. The virus hit without warning, spurring a pandemic that has lasted longer than anyone might have imagined. While businesses across the board have been negatively impacted by restrictions, mandates, and changes in work and travel habits, the real estate industry has been hit especially hard.

Hotels, co-sharing workspace businesses, and real estate developers were among the most affected by the pandemic. Their revenues took a sharp and rapid decline when travel came to a halt, employees began working from home, and new properties sat vacant while business owners waited to see what would unfold before renewing or committing to new leases. 

During times of crisis like this, establishing the correct cash flow mechanism is pivotal for any real estate-related business, because it helps ensure you have the liquidity to avoid capital shortfalls and prevent a debt crisis. A cash flow budgeting and monitoring mechanism typically involves efforts such as more improved sensitivity analysis, increased budget monitoring, and a coordinated approach to formulating and managing budgets across every department, including procurement, engineering, sales, marketing, and human resources, for example. 

If you don’t already have one, it’s equally important to develop an emergency management mechanism to identify crisis signals and early warning indicators of turbulent financial times. And for large real estate groups, it’s vital to conduct enhanced cash flow management at the group level, using measures like concentrated payment authority and centralized management of capital for greater visibility and coordination across the organization.

Tips for Improving Liquidity Now

Given the continued volatility of the business environment overall and the real estate industry specifically, it’s essential to make the right moves now to improve your business’s liquidity. These tips can help. 

  1. Understand your minimum cash requirements and current position. Assess how much cash you need to operate the business, compare it to your current cash flow and reserves, and determine whether you need to improve your liquidity. When evaluating your current cash position, be sure to identify how much cash you have across various entities and countries, whether that cash is readily available or restricted in any way, and whether any cash flows are exposed to risk. 

  2. Develop a short-term cash flow forecast.  Forecasting your cash needs for the next three to six months can help identify events that might cause a cash flow problem and quantify their impact. The best forecasts consider a wide variety of what-if scenarios. For example, is there a risk your revenue might decline due to supply constraints, labor shortages, or other pandemic-related impacts? Are you seeing your material costs rise? Robust scenario planning and forecasting can help you anticipate possible headwinds and give you the confidence to make the most informed, impactful decisions on how to improve your cash position before trouble strikes.   

  3. Take corrective action. If your scenario planning and forecasting reveals that you should increase your liquidity, there are multiple approaches you can take to conserve or generate cash. For example, look for ways to quickly reduce your expenses, such as cutting non-essential spending, freezing bonuses or salary increases, and deferring capital expenditures that aren’t mission critical in the short term. Improve your accounts receivable by ensuring you bill customers promptly and receive payment promptly, boosting your collections on aging accounts or offering customers discounts for early payment. On the accounts payable side, attempt to negotiate better payment terms with your vendors, especially where you have strong relationships you can leverage. Consider refinancing short-term debt to obtain longer payment terms to reduce your current liabilities. To reduce inventory costs, evaluate your critical material needs and look at options for better managing supplies. And if you absolutely need to, consider special transactions like a sale or leaseback to improve your liquidity levels.  

The Positive Impact of Shoring Up Your Liquidity

When a chain of franchised hotels and living spaces found its liquidity suffering due to pandemic-related travel restrictions, the company acted quickly. To mitigate the impact of declining revenues, the company suspended its fixed-income contracts with hotel owners and instead moved to a revenue-sharing model. To further reduce costs, the company vacated its offices and laid-off employees. And to generate revenue from new sources, it entered into agreements with hospitals, offering hotel rooms for use as quarantine centers. Thanks to measures like these, this hospitality company reduced its liquidity risk and increased its cash reserves during a difficult time.  

Maintaining good liquidity is critical to ensuring your business can thrive even in the midst of uncertainty or instability. The financial services experts at Scrubbed can help you assess your cash position and identify the financial and operational levers you can pull to improve your liquidity. To learn more, contact Scrubbed at [email protected] or 800-837-5160.