Cash flow management plays critical role when crisis hits real estate: Rohit Garodia

Shreya Chaware
/ Categories: Expert Speak
Cash flow management plays critical role when crisis hits real estate: Rohit Garodia

Instances of financial indiscipline are always noticed when real estate developers get over-ambitious and go on a land-buying spree, or take more projects than possible. 

Managing Partner of Pecan Reams, Rohit Garodia believes that cash flow management plays a critical role when a crisis hits real estate.   

Real estate developers encountering a cash flow management crisis is often not unheard of. A fairly common situation, it is often seen to be a fallout of expected market trends of the sale price increase and high-volume unit sales not being realised. Alarm bells are set off when developers face a situation where receipts are lesser than payments that need to be made.  

Indiscipline  

When it comes to finances, indiscipline leads to a breach in management bandwidth along with putting the financial strength of the developer to test. Instances of financial indiscipline are always noticed when real estate developers get over-ambitious and go on a land-buying spree, or take more projects than possible. These situations lead to the diversion of funds meant for project A to project B and then, the rest of the time is spent in crisis management as well as in raising financial resources to cater to the original target of the funds. 

Bad decisions 

Financial decisions are crucial for every entrepreneur and many end up defaulting payments as a result of such wrong decisions. Buying land at an astronomical price is one such example of a bad decision. Developers have been eventually hit badly in Mumbai and other metropolitan cities where they have bought land assuming a change in policies, an increase in floor space index (FSI) in the future, prices increasing, etc.  

Taking such crucial financial decisions are to be arrived at by being realistic in estimates.   

Not selling projects while waiting for sales prices to increase incurs a high debt or paying exorbitant interest rates further adds to bad decisions. It may also include project delays that lead to cost escalation and a lot of interest being paid to lenders as well. Overall, such bad decisions lead to a project being tagged as net-negative.   

Understanding project direction

Understanding overall cash flow would also mean understanding future in-flows as well as out-flows. This understanding will help developers faced with a cash flow crisis, answer the question on the project being net-positive or net-negative from a cash flow perspective. While a net-positive project is temporary, a net-negative project is longer and tougher in resolution. If faced with a cash flow crisis, it is important that the developer separates project flow from lender equity flow.  

All negative spending should be curtailed and spending is to be done in a highly disciplined manner, while giving a push to value engineering, communicating with project consultants, or renegotiating pricing with vendors. And unless more money is arranged by the developer and pumped in after studying the situation and making crucial changes to the tax-flow model, turning around a net-negative project is impossible.  

Missing positivity  

Solving a cash flow crisis will be easier for a developer who remains focussed and positive. However, a fall of confidence and lack of a positive spirit to go after resolving the cash-flow crisis is common, given the pressure of making payments and answering questions from stakeholders. Having a positive attitude in this fight can help an entrepreneur get a crisis-hit project out of such a situation. 

Being aware 

Developers usually, overcomplicate crisis as their situational awareness is missing. By not being aware of their actual cash-flow situation, they also miss focusing on its resolution, and as a result, their positive spirit drops. A cash-flow situation is like a steeplechase, where one jumps over obstacles, carrying some along but only till the finishing line. By not being fully aware of one's financial situation, developers tend to overcomplicate things rather than get out of it with a resolution to the crisis.      

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