Recent years have seen explosive growth for commercial real estate investment companies. It’s this kind of growth in revenue and investments that cause so many companies to quickly lose sight of necessary improvements to their financial infrastructure. An unfortunate oversight from sluggish response in bettering financial infrastructure during high growth periods would be a diseconomy of scale; that is, growth happens, but with growth, enough inefficiencies and added costs are created, that a per unit average cost rises. More costs, less income. Conversely, an economy of scale would create reduced average costs for each marginal unit of output. Actively evaluating your company’s financial infrastructure is the best first step towards an economy of scale in your business’s upward momentum. Here are a few considerations:
Excited to build on your base of investors, growth implies greater need for capital, often through attracting larger institutional investors in addition to those brought on through relationships. Institutional investors, however, will demand much more scrutiny of your financial processes, experience in the market, time spent on investments by key individuals, on-time reporting, and return estimates, to name a few among a long list. Some of these investors will also engage other firms to evaluate your business; all to mitigate risks and maximize returns. Provided that context, nailing down a strong financial framework and process in your business will be critical in demonstrating those competencies that high net worth individuals and institutions will use to critique you in consideration of placing their funds under your management.
Demonstrating a robust pipeline of projects can set a real estate company apart. The implication to investors is that your real estate investment and development company can say “no” to projects. A billion-dollar fund can be raised, but a weak pipeline could lead to acceptance of riskier or low-return investments in haste to place capital. A five-billion-dollar pipeline and a one-billion-dollar fund now open the door for the crème de la crème.
Accounting is the language of business. In considerations of financial structures, the more you can force your operations into a strong accounting-driven environment (whether your users know it or not), the more useful data you will have. Starting off, Excel is often our go-to tool in most all things financial, but that reliance can become your undoing as a business expands. Tools should actively talk; without communication between programs, decisions will be made on poor information, and mistakes will be made. Unfortunately, in most applications of Excel, Excel is annexed off from the larger financial reporting system, open to the wild-wild west of overly customized reports, hard coded information without adequate support, and complex cell formulas subject to breaking without you always knowing. A strong Enterprise Resource Planning (ERP) tool will be the necessary step to pulling users into the accounting environment and ensuring accuracy of financial statements and greater visibility of decision-making data to users. Many ERP systems are built to improve upon and accommodate for every step in your financial infrastructure, from the moment your analysts identify new opportunities all the way up through completion, operations, and distributions of cash returns.
Data management is a central theme herein, in some form or another, but as the quantity of data grows, tables and spreadsheets become increasingly more inefficient and introduce greater likelihood of human error. Hundreds or thousands of unique waterfall distribution calculations can introduce too many variables. Spreadsheets can act as a great check-figure, but alone, shouldn’t be relied on as you scale up. Collaborative software that ties elements of accounting and distribution arrangements in one place can ensure accurate distributions to your investors and peace of mind internally. To build on the aforementioned ERP system, not only can investors, particularly your institutional investors, have greater peace of mind that data is being collected accurately, but these systems can provide live visibility of equity positions in investments to investors. Being able to demonstrate that flow and clean handling of investor capital will not only increase investor satisfaction but create opportunities for fresh capital and continued growth.