There seems to be nothing to talk about in business at the moment … except of course for Coronavirus!
Businesses in Australia directly impacted by the pandemic [because that’s what it is labelled now] have been feeling the pinch for weeks. The flow-on effect is only just starting to be felt by the next layer of connected businesses but with things changing hourly, this sh!t is getting very real, very fast.
I am not one for doomsday scenarios or adding to the panic, but our industry is going to be affected and you do need to act to protect you, your family and your business.
- If your business is already struggling, I’m sorry but you need to make some hard decisions.
- If you don’t know how your business is going, you need to get to the bottom of your position now.
- If you are doing well, you still need to make sure you have no waste in your business, and you may even be presented with some opportunities.
Clients are still reporting good results within both their sales and property management divisions, and typically a property management division will perform very well in tough financial times. But, is this crisis different? I suspect it may be!
I don’t see banks calling in debts and forcing sales – their brands cannot afford more damage – so this could limit the supply of stock for both sales and rentals. Who is going to want to sell in tough times? Where are new tenants going to come from if we have a jump in unemployment? And that’s before the ‘Kochie Effect’ kicks in [i.e. media messaging] on demand and consumer optimism.
The real estate consulting services team at businessDEPOT [across all divisions] have sat down and applied their mind to what they recommend you do now to get ready for uncertain times ahead.
Calculate both your cash and profit breakeven point
The first thing we do with a client that comes to us in a bit of strife or uncertainty is to calculate their breakeven point. Your profit breakeven point is the level of sales you need to make each month to just breakeven from a profit perspective. Take this one step further though and calculate your cash breakeven by also including principal loan repayments, owners’ drawings or other cash commitments.
Think about the things you can do to reduce your breakeven point and de-risk your business. Common strategies to reduce your breakeven point include:
- Reduce fixed costs [more on that below]
- Revert to some Principal Sales [higher margin work]
- Grow your rent roll [more recurring revenue]
- Buy an additional rent roll [even more recurring revenue]
- Revert to interest-only loan repayments [reducing your monthly commitments]
- Renegotiate loan repayments [to push out repayments]
- Defer some tax payments [but be upfront]
- Focus on staff mix [and impact the % gross profit you make on each sale]
Review your costs and, [I hate to say it] cut some costs if you can
With the new real estate awards now in place, you must be very conscious of the potential commitments you have with your salespeople as well as your non-commission team members [and that’s before looking at any other costs]. Work out what your minimum pay requirements would be if your team make no sales in a month and build this into your breakeven calculation.
If you have been reviewing the performance of certain individuals for a while, it is probably time to make the hard decisions. If you are concerned about someone’s performance but not yet talking about it with them, it is time to start the discussion.
The most common areas we see Principals cutting costs in the first instance:
- Casual wages [one of the easiest and first to go]
- Permanent team wages and salaries [if excess to your needs]
- Non-performing salespeople [even if commission only you have a minimum commitment]
- Subscriptions you are not using [I hate money going out the door with subscriptions you don’t use]
- Don’t fund advertising for others [unless you can justify the strategic investment but best to pass on to the vendors]
- Growth costs like BDM or sponsorships [you may need to take more of a short-term focus]
- Try and get out of the lease or get a subtenant [of course much harder to do]
No one likes cutting costs, especially when there are people involved. One of the things I am always amazed about in tough times is that if you communicate openly with your team they often will come to the party. One of my favourite things to do in tough times is asking for your team to give you a bit of leeway. Maybe they can take some leave without pay or spread the load for everyone by cutting to 4 days a week [but with you committing to no overall team cuts]. Please note however that it’s important you understand your obligations as an employer and the options around redundancy, standing people down, unfair dismissal.
This link will provide further details on your obligations as an employer: https://businessdepot.com.au/blog/coronavirus-and-your-workplace/
Focus on incremental profits
Once you know your breakeven point you should also have a good idea of your profit formula. You can then also focus on incremental profits … how do I get one more dollar on the bottom line?
Another critical thing to understanding how to grow your profits is to understand your profit by division. You absolutely must be able to track your profits across the following divisions:
- Admin [or shared services]
- Other specialist divisions like Commercial or Holiday lettings
If you don’t know where the money is coming from, how will you work out how to add to it? Systems like Xero are great for streamlining processes and automating data entry.
Be prepared for emotional stress in your team
Not only may your team have their own financial stresses [maybe their partner or extended family have lost their job], you need to also consider their emotional stresses.
Different personality types react differently to different situations – some will panic more than others, and some will be more blasé. I would recommend communicating with your team transparently on what is going on and answer any questions they have in advance to show you have it all under control and you have a plan. Prepare a Coronavirus policy or update and review your leave policies to incorporate pandemic situations and make it clear when they could be requested to work from home, self-isolate or take the necessary leave.
Review your supplier arrangements
Real estate businesses don’t have a huge list of suppliers they depend on but nevertheless can often build large amounts owing to advertising channels and so forth. Be upfront with your creditors, ask for a deferral of terms and openly communicate on what you can or cannot do.
The biggest risk with transparency though is that they stop providing credit which of course could jeopardise the next deal. Consider using providers to defer the payment of upfront costs into the future or pass the payment arrangement on to the vendor.
I still harp on all the time about how recovering VPA upfront is critical to the success of your business and important for the culture you create – in tough times this is critical
I am curious about how this crisis changes the way we work in the future. My gut tells me that this is truly going to change how we work and make flexible working and remote working more of a normal part of the industry.
One thing I am sure about though is that in tough times that’s when real change happens. Will this be the time for technology to really get traction? When things are tough, adoption is so much more successful because you NEED the change to work. Still involve the team in the decision making but there comes a point where you just must back yourself and go hard down a path.
One of the biggest tips I would share though is to make sure you talk to someone else who has already implemented the technology you are looking at. A warts n’all discussion with them can help identify if it will be a success for you or not.
Maybe it’s time for a merger or exit
In tough times, an industry often consolidates – this is not necessarily a bad thing. Have an open conversation with peers and explore opportunities to work together, share costs and overall create a 1+1=3 result.
Knowing and liking the person is critical to a successful merger. As is trust and a history of having collaborated in the industry.
To reduce their breakeven point many decide to buy a rent roll. It would have to be one of the most stable businesses to operate [no matter the industry] with a recurring revenue stream to rely on each month [of course subject to managing your arrears where you can].
With the demand to buy potentially growing, it could also be a good time to sell. Do you have the energy for another cycle? If not, consider your options.
Be Human [even if you are working remotely]
We are still people businesses at the end of the day – it is important to make sure this is not forgotten in tough times [especially with social distancing and remote working kicking in].
It looks like we will need to set up our teams to work remotely for some time, so make sure you have the technology to support them ready to go.
- Audit the setup of your teams at home [if that’s your plan]
- Is it time to invest in some laptops?
- Do your team members have somewhere remote to work?
- What is their internet connection like?
- Do they have access to online meetings tools like Slack or Skype? Many of these are free.
- Do they have quality headphones with microphones to ensure online meetings are as effective as they can be?
As the leader, build into your day time to just check in with your team members. Different people will react differently to remote working but they still need your leadership, support and counsel. It is also a great opportunity to show you care and stay in tune with any roadblocks to success.
Time to shine as a leader
Leadership is one of the factors that I truly see differentiating the great businesses from the mediocre. Now is the time to shine, and now is the time where all that hard work you have put in for decades comes to surface in the culture you have created in your business.
Have open conversations. Have the tough conversations. Just keep having the conversations about what is going on and show them an authentic leader who doesn’t always have a plan but can adapt to a changing situation.
Get some accountability
I hope this is just a ‘blip’ in the graphs of performance, but the reality is we do not know how long this will last. Either way you need total transparency, or as I always like to say, you need to know who is sleeping on the couch [and drinking your beer]. You cannot afford people sleeping on your couch anymore.
Set the expectations and track the performance but the most important part of the accountability piece is the discussion around ‘what are you going to do about it’. Step up the regularity of discussions if you need to but just make sure that you are having the discussions.
You might need to tip some money in
The reality is you may need to track down some personal cash to tip into the business. Look around the place now to identify where you may have some cash you can access. Again, this may not last for long, but to get through the tough times you may need to access some cash to pay the bills.
Are there any redraw facilities available on your home loan or extra loans you can take out personally? Talk to the banks or your friendly broker now to get the wheels in motion. We don’t know what their appetite to lend will be in the future so free up some cash reserves now for the rainy day.
Thanks to the following for all contributing to this blog post:
Craig Harrison – Head of Real Estate Accounting+Advisory [Brisbane]
Alan Dawson – Head of Agency Broking [Brisbane]
Rebecca Mihalic – Head of Tech Advisory [Sydney]
Anna Chipperfield – Head of People+Culture [Brisbane]
Andrew Chamberlain – Director Accounting+Advisory [Geelong]
Paul Tucker – Director Accounting+Advisory [Melbourne]
Patrick Mead – Manager Accounting+Advisory [Brisbane]
Rob Shepley – Director Legal [Brisbane]
Whether you consider the government and media response to Coronavirus an overreaction or hype, or not, there is no doubt consumer sentiment and business confidence is taking a hit. Get on the front foot by taking the time to consider what you can do in your business to make it more resilient now and into the future.
The federal government has also now responded and provided some detail on their economic stimulus package. There look to be some great opportunities for real estate businesses in these announcements – especially up to $100,000 cash injection from the government and potentially $1,500 per employee per fortnight with the Jobkeeper Payments. You can review our take on the stimulus package here.
Qld government has also come out and provided some deferrals of payroll tax lodgements and payments. More on that here: https://businessdepot.com.au/blog/queensland-government-coronavirus-stimulus-package/
NSW government has also waived some payroll tax commitments and some government fees. More on that here: https://businessdepot.com.au/blog/nsw-stimulus-package/
Still want to know more, we are hosting a webinar in conjunction with the REIQ on Friday. You can register here: https://businessdepot.com.au/events/webinar-navigating-these-times-as-a-business-owner-in-real-estate/
If you would like to know more about how you can take advantage of the stimulus available or how your real estate business may be impacted, reach out to one of our real estate specialists at 1300BDEPOT or email@example.com.