The inflation numbers that appeared on Friday—a 1 percentage point jump in May bringing the 2022 annualized rate to 8.6% from 8.3% in April—were “stunningly high,” as one investment analyst told Business Insider.
There are many implications for all industries, including commercial real estate. As inflation rises, so do many costs. There is one aspect of operations in particular that is worth considering: the need for strong cash management.
“I think this is an area that’s been difficult to get visualization and action around,” Anne Hollander, CEO of Lobby CRE, a Thirty Capital company, tells GlobeSt.com. “It is a very old story with new and faster technology around it. Historically, we all knew it was an issue, but it hasn’t been adopted [widely] in real estate.”
Cash management is simple in concept: a company coordinates the collection, disbursement, short-term investment, and overall control of cash flows. The function is critical if a company is to meet its financial obligations, have sufficient cash to operate and invest, and gain a return on idle cash.
Again, it sounds simple, but is much harder in practice. The people and systems involved must have a transparent view into when money will arrive and clear, which bills are most important and what could be delayed, how much financing might be incurred in a juggling process, new outflows into marketing and acquisitions.
Now, Hollander has a particular interest in the CRE application because her company has an asset and portfolio management platform. However, her views on the importance of the topic are mainstream in business.
What further complicates cash management is the structure of many companies, CRE firms in particular.
“A lot of other industries have [used technology to manage cash,” she says. “We’ve put a human or department in the middle, called asset management.” That can fail because of the siloed nature of many CRE companies, with debt, operations, equity, and legal entity management considered separate even though each affects the others. “Everyone is trying to optimize their own individual lever in their own individual silo.”
The result is what in the late 1990s and early 2000s, during a faddish interest in business process reengineering, used to be called suboptimization. Departments would have separate mandates and compensation systems that would push managers to optimize performance within narrow departmental requirements. For example, procurement could cut back on purchasing, ordering without margin for error. That made inventories look good even though there was not enough flexibility to handle sudden needs to expand manufacturing or shipping.
Managing the interplay of all CRE firm departments when it comes to cash management is beyond spreadsheets. There are equity distribution requirements, changes in revenues, operations, market data, people data, and more.
Companies that want to weather current inflationary periods and the impact of rising interest rates will need to do better, using technology to manage cash more precisely in operations and investments.
