Take Command of Costs
Take Command of Costs
It’s a maxim every commercial pro knows: To boost a building’s value, cut expenses. Smart brokers and managers apply the same principle to their businesses.
"Commercial real estate is very volatile, and the only thing you can control is expenses," says Mike Hammond, CRE, SOIR, president and CEO of Picor Commercial Real Estate, a Cushman and Wakefield affiliate, in Tucson, Ariz.
It’s essential to act promptly when you see revenues slide, says Jesse Holland, CPM, with Sunrise Management and Consulting in Latham, N.Y.
"Most expenses just can’t be turned off, so when you know a contract isn’t going to be renewed or a deal isn’t going to close, you need to start pulling back immediately. Fortunately, most bad news also comes 30 days in advance."
Knowing not just when to cut but which expenses to reduce is critical for a company’s long-term health, says Rod Santomassimo, CCIM, president of Massimo Group LLC, a real estate consulting firm in Raleigh, N.C.
"You have to not only re-evaluate your budget but also decide how to allocate your money most effectively and not make cuts that will harm your business."
1. Slim Your Payroll—Thoughtfully
Since payroll accounts for the lion’s share of cost for most commercial real estate companies, wage and bonus freezes and layoffs or attrition are the most effective ways to reduce operating expenses in a hurry.
"We were able to cut our operating costs by between 8 and 10 percent that way," says Don Ossey, SOIR, principal of the Capacity Commercial Group in Portland, Ore. Ossey eliminated a receptionist position and let other administrative staff pick up the slack. E-mail, direct dial, and cell phones "have made answering the phone less demanding," he says.
Not everyone agrees that the receptionist should be the first cut.
"When callers have a problem, they need a live voice at the other end or they get more frustrated," says Vic Vacek, CPM, president of Central Management in Houston. Vacek kept his receptionist, but doubled up the responsibilities of his building managers to include administrative work.
While cutting personnel is tempting, since workers usually represent the largest expense for a business, it can be dangerous, says Denise O’Berry, a small-business expert and author of Small Business Cash Flow: Strategies for Making Your Business a Financial Success (Wiley, 2006).
"When you cut staff, you cut knowledge, which can impact future business." Asking people to perform administrative work that isn’t their strength also invites errors and takes salespeople away from potentially more productive work, she says.
For Bruce Holmes, CCIM, president of Century 21 Venture Ltd., in Augusta, Maine, doing the same work with fewer staffers means "we no longer have the luxury of creating a professional property brochure for every listing."
Instead, he focuses on the analyses a client requests. He plans to return to a more comprehensive package when business improves.
Technology can provide considerable help in doing more with less. Web-based tools such as REApplications, LogMeIn, and GoToMyPC, which let you access desktop files remotely, are another way to fill at least part of the gap left by a smaller administrative staff, Ossey says. "Everything I or an assistant could do at my desk, I can now do from anywhere."
Another way to supplement a leaner staff is to tap into virtual workers. Santomassimo relies on virtual workers and encourages his coaching clients to do the same. "Even companies in small towns can benefit from the cost savings of outsourcing, whether across the United States or abroad," he says.
Clients have used virtual help for everything from owner searches and market research to online procurement.
Finding the right virtual worker can involve a few false starts, but perseverance usually proves worthwhile. Santomassimo suggests trying two or three virtual employees at the same time—assigning each a part of the same job—until you find the right fit for your work style and requirements. You also need to develop specific guidelines for how a job should be completed.
2. Weigh Every Outlay
Keeping a closer eye on where the money goes and asking yourself and others whether each expenditure is absolutely necessary can yield real savings, says Hammond. He’s instituted a policy that requires all brokers to get a sign-off from him or the office manager for expenditures.
"It isn’t that we won’t approve spending, but we ask people to stop and think if it’s really necessary. Do they really need a 3,000-piece mailing on a property or are they just doing it to please the owner?"
Hammond exercises a similar "need" review when brokers ask the company to purchase a new piece of software requested by an owner. He suggests that the broker go back and ask the owner to pay half.
Empowering your people to come up with cost-cutting ideas is another way to pinpoint superfluous spending, Holmes says. One of his employees pointed out that the company was paying for monthly subscriptions to several listing sites that brokers no longer used. Dropping them saved several hundred dollars a year.
Holmes also migrated most of his advertising online.
"We used to run 10 or 20 classified ads a week to lease property. Then we built a leasing Web site to show off our properties. Now we run one two-line classified a week, directing prospects to our site."
The result: $12,000-a-year savings in print advertising.
3. Share the Pain
For most commercial brokerages, staying solvent during the downturn has meant passing along more costs to their selling brokers. For example, Hammond now puts an annual cap of $7,000 on the amount the company will reimburse brokers for entertaining clients. Ossey has halted reimbursements for industry events.
One place that seems like an easy cut—charitable giving—still gets support from many brokers. "It gets the company a lot of recognition, and it’s the right thing to do," Hammond says. He has reorganized his donations for more impact, focusing primarily on groups where his brokers are active instead of just making one-off donations.
Renegotiating with vendors and asking for price adjustments in hard times is a time-honored building management strategy that’s transferring to the operations side.
"We negotiated with our waste management vendor by saying that if we couldn’t cut costs, we’d have to rebid the contract. We saved 25 percent," says Chip Watts, CCIM, CPM, president of Watts Realty Co. in Birmingham, Ala.
He used a similar approach—this time getting faster Internet speed at a lower cost—with his telecommunications vendor. Savings: about $3,500 a year.
Vacek also used his real estate skills to save—by renegotiating his company’s office lease. Moreover, "I don’t usually ask for a leasing commission when I rent space for myself, but this time I did," he says.
4. Track Cash Flow Carefully
Retooling your budget is great, but "budgets and financial statements don’t give you a good picture of your cash flow—they only show what you have to cover in payroll and bills," says Hammond.
He relies on a weekly cash flow statement that contains only a few items: cash in the bank, receivables, payroll, outstanding bills, and monies in escrow that will close in the next 30 days. With these few data points, he can clearly project his cash position 30 days out and make cuts quickly.
O’Berry advises forecasting cash flow—both expenses and revenues—out at least six months. Use recent changes in the sales cycle as well as averages of how long it takes transactions to close and what percentage doesn’t become final to estimate revenues. Also factor in the projected impact of new marketing programs. And, even if it’s painful, don’t be too optimistic.
"It’s always better to underestimate revenues," says O’Berry.
Watts uses his property management accounting program to flag his personal business expense items. He looks for costs that have risen more than 8 percent in one month. "We see the variance right away and are able to address it quickly," he says.
He’s also stopped the practice of advancing company funds to cover property repairs if an owner was short of capital.
"Even though we'd eventually get the money back with interest, it was hurting our cash position," he says.
Not collecting money promptly after you’ve provided a service is the biggest mistake most small businesses make, says O’Berry. Don’t do the work and then wait until your next 30-day billing cycle to invoice a client. Do it immediately, she advises.
Even better, see if you can bill for at least a part of management or get a retainer for leasing before you start work.
"It may not be the normal practice, but it doesn’t hurt to ask," she says. She also suggests getting on the phone and following up on a bill the day after it’s due.
5. Get Staff Behind You
By adopting a corporate philosophy of including employees in decision-making, they will be more likely to accept wage freezes and other cuts, says Holland. The strategy has helped him hang on to top performers. Transparency also helps.
"There’s a natural suspicion of the owner and the belief that he or she is making a fortune," says Hammond. "Showing employees your company’s financial statements helps them understand why we’re doing things. It also helps build trust."
Giving staff a voice in where to cut costs also gives you critical buy-in. When Vacek realized he needed to make adjustments in medical insurance to contain costs, he presented the options to his employees and let them decide whether a higher deductible or a higher out-of-pocket per office visit was the best option. They chose the higher deductible.
When you brainstorm with staff on ways to reduce expenses, don’t ask, "What can we cut?" says O’Berry. "Instead, ask: ‘What do we spend?’ Every expense should be looked at ruthlessly."
To ensure that cuts don’t harm business, "we talk to our key brokers about what the impact will be," says Ossey. And since the firm’s principals are all selling brokers themselves, "we know that if something bothers us, it’s probably bothering our other brokers, too," he says.
6. Build as Well as Cut
Keep in mind that cutting costs is only half the picture. "You can only cut expenses so far. Then you have to start concentrating on generating more revenue and getting a bigger market share," says Ossey. At a time when some commercial real estate companies are closing or consolidating, there’s less competition for clients, he says.
It’s also essential to use some of your savings to grow your business. Holmes is using some of the money he’s saved to fund needed computer upgrades. And though a line of credit helped him get through the downturn, he’s now building a reserve fund for future downturns.
"We started our business relying on self-funding for growth, and we’re returning to that model," he says.
"There’s more opportunity today than ever if you’re able to recognize it," says Holland. "There are lots of problems, but if owners didn’t have problems, they wouldn’t need us."
10 Small Savings to Boost Your Bottom Line
Try these cost-saving ideas from fellow brokers and managers.
- Print fewer documents and use gray-scale printing instead of color for drafts.
- Convert documents to PDFs and e-mail them to cut overnight fees.
- Centralize purchasing of variable expenses such as signage and brochure printing.
- Upgrade computer memory instead of buying new machines.
- Pay your bills only when they’re due unless the prepayment discount is substantial.
- Start a fun fund to provide a small monthly amount for employee treats. It helps fight stress and keep up productivity.
- Sublease unused offices to related businesses such as accountants or appraisers.
- Ramp up rental income collections so they’re reflected sooner in your management fee.
- Use zero-based budgeting so costs don’t exceed income, and revise quarterly
- Analyze bank fees and discuss ways to lower them with your banker.