By Gita Faust
Net cash flow is a crucial aspect of any business, especially for real estate investors who need an accurate understanding of their financial performance to make sound investment decisions. In simple terms, net cash flow refers to the amount of money that comes in and goes out of a business during a specific period. It is different from profit, which is the overall indicator of financial health after expenses have been deducted.
The net cash flow formula, measured monthly or annually, determines a business’s total cash inflow, including rent, minus the total cash outflow, such as maintenance and financing costs. The formula can be used to analyze the income and expenses of individual properties or the entire portfolio.
Net cash flow = Total cash in – Total cash out
While positive cash flow is the goal for real estate investors, hidden costs may hinder it. Strategies to maximize cash flow include increasing rent (within reason), renovating and upgrading properties, using online rent collection to prevent late payments, enforcing late fees, charging monthly rent, and reducing tenant turnover through comprehensive screening.
However, the net cash flow formula has some limitations. It does not consider non-cash expense deductions, such as depreciation, and it heavily depends on the market in which the business operates. Therefore, landlords should use other formulas, such as:
- Net operating income
- Capitalization rate
- Gross operating income
- Gross rent multiplier
- Occupancy rates, in conjunction with the net cash flow formula, to get a complete picture of their rental properties’ financial performance.
Yes, QuickBooks allows you to track a budget and forecast by property. For example, you can create a budget for each of your properties or rental units and then track your actual expenses against that budget to ensure you stay on track financially.
Once you have created the property or rental unit budget, you can track your actual expenses against that budget by running a profit and loss report with the class filter set to the property or rental unit class you created. This will show you how much you have spent on each expense account compared to the budgeted amount and your total income and expenses for that property or rental unit.
Here are five reports to customize to track your equity:
- Profit Loss by Property
- Profit Loss by Property compare multiple years.
- Profit Loss by % by income
- Balance Sheet by Property
- Budget vs. Actual Expenses by Property
Finally, accounting and property management software such as QuickBooks can help landlords track their income and expenses, collect rent online, digitize receipts, and categorize expenses, making calculating net cash flow at any given time easier. Knowing net cash flow is vital to being a landlord and can help investors make informed decisions about their rental properties.
Gita Faust is the founder & CEO of HammerZen, which helps businesses save time & money by keeping track of The Home Depot purchases and efficiently importing receipts and statements into QuickBooks. National REIA members receive discounts on QuickBooks services and software. Learn more by visiting www.hammerzen.com/nreia.