On today’s show we’re talking about what it takes to increase profitability or reduce the cash burn rate in the pandemic environment. Many businesses have taken advantage of the government programs that have provided emergency funding. But the indications are that emergency government funding is going to reduce or come to an end over the coming months. Now is the time for businesses to tighten their belts and focus on expense reduction before those subsidies expire.
The biggest expenses for most businesses are debt service, taxes, employee salaries and other fixed costs like contracts.
At a time when businesses are being tested for resiliency, this is the time to focus on improving profitability. That means a combination of tactics and strategy. Strategy is all about improving revenue, new marketing, new sources of income.
These approaches can have a big impact on business performance. But when you focus all of your attention on the strategy, these changes sometimes take longer.
There is also something to be said for working on the short term tactical. If you have suffered a loss of revenue during the pandemic, you are probably dealing with a drop in cash flow, or even negative cash flow.
That means focusing on expense reduction. It’s amazing how much a company can accumulate in terms of discretionary expense over a period of time. Expenses that made perfect sense on the day they were approved, might be of lesser value a year later. Subscriptions are one of the biggest culprits. Now sometimes these expenses are small, which is why they’re allowed to linger, month after month.
I’ll give you a good example. My company hosts its mail with Google using their business applications suite. Each email account costs $6 per month. For the quality of service, Google delivers a tremendous amount of value for $6.
But there are two items that make a big impact on the profitability of a real estate project.
- Lowering interest costs
- Lower property tax costs
Many cities are under pressure to cover revenues lost during the pandemic. They’re not allowed to borrow funds to cover operating expenses. As a result, you can expect significant property tax increases. There are two ways that cities increase taxes. The first is by increasing the tax rate charged against the assessed value of a property. The second way is by increasing the assessed value. The tax rate is something that is debated at city council and passed into municipal law. But the property assessment valuation is a hidden tax increase. If they deem that your property went up in value by 10%, well then your taxes just went up by 10%. The responsibility rests with you as the property owner to contest the valuation increase and maintain a lower valuation for tax purposes. Large developers that I know maintain a full-time position for the sole purpose of contesting property tax valuations. On a large portfolio, the savings more than pay for the salary for that person, and still result in a net tax saving to the owner. So you want to be contesting your property value assessment and making arguments that your property has been unfairly assessed.
The second big saving comes in lowering your debt service. That can come in several different ways.
- You can refinance over a longer amortization period. This will go a long way towards reducing your monthly principal and interest costs.
- We are in an era of historically low interest rates. These rates are projected to persist for the next couple of years based on guidance from the Federal Reserve, and numerous other G20 central banks around the world.
If you have high interest bridge loans, you want to negotiate better loan terms with your existing lenders, or replace those loans with lower cost debt.