Cash flow management from a Development manager's perspective
I often ask myself what the difference between managing a £3-4K salary against managing a scheme budget of £300m-600m. My answer is simple, whatever the project's size, manage it like it is your own money. For those with poor credit, I would strongly recommend that you do not follow this suggestion.
The way to see it is that every month you receive your salary (Budget), you allocate your budget for your spend (expenses), and you forecast your bills/ income (cashflow) whilst ensuring you can cover your expenses without needing to borrow more. To rephrase for the professionals, you manage your project spend to ensure that it does not exceed your approved project budget whilst keeping an eye on future spending. This is effetely what cashflow management is when managing large regeneration projects.
It is about knowing what you will likely spend every month without many surprises. I am sure that sounds simple but is it?
The property development game
Before you make money, you have to spend money, and in property development, you sometimes have to spend up to 100% of project costs before you make back a profit. In the development cycle, you have to blow money fast, and you only make cash when you sell a completed home.
One the challenges that many budding developers do not appreciate is that in the development game, you do not earn money until the end of a project especially if you are doing the developments from the cradle (land purchase) to the grave (completed units). That is why property development is generally for those who have a bit of dosh and can rely on other forms of income because they won't be making money until the whole thing is done. The professional developer will be looking to forward sell homes to a Private Rented Sector ("PRS") Investor or housing association, which helps with getting income during the build process.
With the large sums of money involved in property development, cashflow management must be given the respect it deserves. Getting a cashflow wrong can spell disaster like not having enough money to cover your mortgage.
What is cash flow management?
My definition of cash flow management is spending when you are forecasted to and being prepared for future spend whilst keeping within your approved budget. It's about knowing when costs are expected to be spent.
For the layman, this means paying your bills when they are due whilst ensuring you have enough to pay your bills next month and the one after whilst ensuring you do not end up in a situation where your salary/ investments do not allow you to meet you spend overall.
When I started in property development, I remember that the first projects I worked on were had budgets of between £3-£7m. I was flabbergasted by managing that amount of money as the most I had managed at the age of 25 was the £6k I saved to do my masters. I had barely managed £1,500 a month at the time, but I must say I was prudent with money.
When I started cash flowing costs, I thought it was over for me if I got this wrong. In reality, that was an overreaction. Cash flows are fluid and should be based on sensible forecasts and be within your approved budget. The good thing about cash flowing is that it is intensive, to begin with, but easy to manage as you move through the months.
I use cashflows to manage my personal and professional finances. It is generally a good skill to have. I remember when I was in so much debt, and I was practically living in my overdraft. To ensure I did not go over my the agreed limit, I created a day to day cashflow spreadsheet to make sure I stayed within my limits. If you want a copy, let me know.
What is included in a cash flow?
Cash flows should include everything you are expecting to spend or receive on a project. The main cost items are build costs, professional fees, Planning costs, legal fees, interest and sales receipts.
The most significant expense on any development project is the build costs. Build costs generally follow a cashflow profile called an s-Curve. The S-curve illustrates the progression of build costs that peak near the middle of a contract and then down. A large proportion of the build cost is between the beginning and the middle of a project.
The build costs are agreed between a developer, quantity surveyor and the builder. If a contract is worth a million pounds over 12 months, the spending curve may look like this:
All other cashflow items will either be cash flow on a straight-line basis (equal payments over a project duration), be placed in lump sums on specific months ( sales receipts, deposits, s106 costs, CIL and land costs) or will flow in line with an agreed payment profile (affordable housing or PRS homes).
For all of you who are consultants who or will be looking for a consultant on a project, before you appoint a consultant, ask for their fee drawdown (cashflow) so that you can put this into you master cashflow. This simple trick will make your life simpler for both consultants and developers and even reduces disputes.
These two words mean a lot for all developers from all shapes and sizes (both public and private sector). Peak funds are how much money you will spend until you start getting income. To put it another way, if a development is expected to last 12 months and is 100% private sale, all the development/ land costs within will come out of your bank account with no income until you sell the completed homes.
Peak funds are an essential thing to look at as they dictate your interest payments and show you your financial ceiling during a project. If you can not sufficiently meet your ceiling, you have to go back to drawing broad and ensure you raise that ceiling or risk not having a roof over your head.
Cashflow worked example (My daughter's first development)
Below is a worked example of Tia's residence, hypothetical scheme, which involves developing a beautiful mansion in surrey.
• Build cost: £1,000,000
• Land cost: £700,000 (includes stamp duty)
• Programme: 12 months
• Professional fees: £70,000- this is typically 12% of build costs
• Interest rate: 7% rolled up until the end of the project
• S106/ CIL: £270,000
• Contingency: 5% of build costs
• Sales receipts: £3,000,000
• Sales and marketing fees- 3% of sales receipt
• Arrangement fee: 1.5% of the loan
• Exit fee: 1% of the loan
• The scheme already has planning permission
You will note that you will spend £2.2m up until month 11 before you make back a pre-tax profit of £670,757.65 in month 12. Paying for things too early will bring forward your peak funds date, ultimately increasing the amount of interest you pay. Can you survive for 11 months without getting paid a penny?
Cashflow management from a development perspective allows you to see when income is expected so that you know when to settle your debts and avoid expensive charges on late payment.
See the below spend profile on my baby daughters first development:
The horizon and lessons
When managing cash flow always peep over the horizon constantly to identify risks and threats. Cash flowing is an iterative process and should be revised every week. These principles will surely keep you ahead of the game.
Practice with your monthly salary, and perhaps one day you will manage your development worth millions. Stay dreaming because they do come true.
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