2020 hasn’t been the best year for property sales. The market has experienced its biggest decline in almost a decade, slashing agents’ earnings dramatically. For many, this has led to cash flow issues as income has dropped or dried up altogether.
The role that commission plays in the real estate industry means that you need to prepare for unexpected dips. The best way to do this is to take a proactive stance on money matters so that future downturns don’t dent your pocket.
Draw Up A Plan and Budget
A cash flow plan and a budget are two essential tools for managing income and expenses. Your plan and budget must cover 12 months, and rather than making it a once-off exercise, revisit those documents regularly, adjusting them as required.
When drawing up your budget, include cash contingency plans that offer some relief if unexpected obstacles arise. Your annual projected income and expenses must be added to provide an accurate overview. Additionally, consider the real estate industry’s seasonal trends, especially if you are including forecasts that may positively or negatively affect your cash flow.
Income, expenditure, and cash flow forecasts are not an exact science, but that doesn’t mean you should give in to fantasy. You may be tempted to predict property sales will increase by 70% during the year. Even though this may be possible in theory, it’s highly unlikely.
It’s important to be as realistic as possible about yourself and your real estate agency’s current and future positions. The best approach is to be conservative in your predictions and projections. If you find yourself with surplus funds, you can use them for extras that are surplus-dependent or put it toward cash contingency plans.
Keep Track Of Income and Expenses
As a real estate agent, good financial management requires that you keep track of income and expenditure meticulously. Take note of everything, no matter how small or trivial some expenses may seem.
You need to stick to your budget if you want to realize your cash flow plan. If you don’t keep an accurate record of how much money comes in and goes out, budgeting correctly will be impossible.
Review your budget monthly, and when doing so, pay close attention to fixed costs and overheads. You may be able to find ways to save money on at least some of them.
Plan For The Best – and The Worst
When forecasting and planning, put the extra time and effort into drawing up plans for best- and worst-case scenarios. This way, you can try to cover all your bases.
Create your best-case and worst-case plans when you have completed your cash flow plan. Using the plan as a guide, take the best case to be approximately 25% higher than the most likely scenario. Calculate the worst case at 25% lower than the main plan.
Stay On Top Of Taxes
Remember to include taxes in your financial plans. This will help you manage your money and ensure you never fall foul of the IRS or incur penalties.
A smart business strategy to apply here is to pay tax every three months rather than once a year. There’s less paperwork to deal with, and the tax amounts should be manageable. Another way is to put a percentage of your commission into an account that’s dedicated to taxes. Alternatively, you can combine these approaches.
Prepare For Cycles
Like many industries, real estate works in cycles. There are times when the property market is hot, and when it’s not. While these trends aren’t always predictable, estate agents need to develop the habit of being ready for them at any time.
One way to prepare for a downswing is to purchase a few short-term certificates of deposit. You cannot touch the money you invest until those CDs mature. When they’re ready, you’ll get more out than would be possible with a regular savings account.
Another option would be to set up a savings account that you can access at any time, but you add to monthly. If your commission for a month is higher than usual, you can save a larger amount. This way, you’ll have extra capital for the leaner times, and your cash flow won’t be stunted.
As you can see, managing your finances as a real estate agent requires foresight and dedication. By applying those qualities to the tips above, you can put yourself on the path to good cash flow management.