THIS YEAR: CASH IS KING

Suppose I've learned a lot by watching hundreds of businesses succeed and fail while running my own. In that case, the lifeblood of any business is its ability to collect cash, pay bills, and pay its employees, particularly its owners.

However, many beginning investors are profitable on paper but lack enough operating capital to meet their current needs. Jake ran into a cash flow problem, so they considered some tough decisions to keep in the game. He thought he might find another investor to buy his doors, sell a portion of his doors to another investor at wholesale prices, or close all the doors and wait for the foreclosure notices. None of these alternatives are what Jake intended when investing in real estate.

Jake was working without a map, and as wealth-oriented investors say, cash is king. Not knowing how to plan for it could lead to dire consequences for your business.

Any cash flow plan prepared by Jake or an outside consultant can be no more than a guess as to which tenants will pay their lease and whether they will pay on time. However, accurate forecasting when your business obligations are due is not just a 'blue sky guess' but a crucial practice that can make or break your business. The more effort that is put into cash forecasting, the better the educated guess will be and the more accurate the resulting picture of the future operations of your business.

Starting the Analysis

One of the most significant factors to consider in your cash flow forecast is the volume of rent you'll generate. Your sales forecast must be as finely tuned as possible, and the method you use is critically important.

Top-down forecasting is usually dangerous. It involves assuming that your properties have a certain gross lease potential, say a couple of grand, in your area and guessing you will be able to find and keep good tenants at market rents. As rough as this kind of analysis might be, it is better than not making a forecast.

Bottoms-up forecasting is better but takes more work. You count the number of doors, the perceived value of each unit, and whether renters will pay what you are asking. Of course, you take a hard look at vacancies and the cost of getting a unit re-rented.

A sales forecast must require collecting specific facts (not wishful thinking). These facts include your own sales history or the history of similar businesses in the area. It is also extremely valuable to determine the experience of similar operations in your market niche in each property's neighborhood and other parts of the country. For multifamily, consider joining your area's chapter of the National Apartment Association. BiggerPockets has software to give you actual data for your area's rental market.

What about adding new amenities (coin wash and dry), deleting unprofitable operations, assigning a new property manager, or getting rid of one not producing to quota? In preparing a forecast, you must also consider items such as your business's seasonality, the relative state of the economy, and the period over which you will forecast. These factors are not just additional considerations but crucial elements that can significantly impact your business's financial health.

Your ability to forecast sales for the next month is better than it is for three to five years from now. The amount of detail that must be included in the cash forecast is a matter of preference. You can base it on per-door income extended out or an average rent volume per month or year.

Start this new year off with the resolve to up your game. Become more proactive and abandon the casual attitude you accepted last year.

Cash is king, and you hold the royal scepter.

Warmly, Janet, The Tax Wizard