A developer’s financial health depends on three key metrics: sales, profitability, and liquidity. According to Financial Intelligence by Karen Berman, Joe Knight, and John Case, understanding these figures is key for informed decision-making.
In real estate development, a project may have signed contracts, promising profits, yet still require funds for the next construction phase. The challenge arises when stakeholders receive vague updates like “we’re doing well” without specifics on sales, expected returns, or available cash.
Defining Sales: What Counts as Sold?
Consider a hypothetical residential project with MXN $50 million in contracts and MXN $10 million in advance payments. These figures represent commercial commitments and cash inflows, but accounting rules determine when revenue is recognized.
A full sales report should differentiate between reservations, active contracts, cancellations, and delivered units. Mixing these categories obscures the true progress. Additionally, the effective price after discounts, included features, and commercial concessions provides a clearer picture.
Developers must also consider the obligations tied to each sale. Contracts may include commitments for finishes, equipment, or delivery dates that impact construction and treasury costs. Evaluating sales solely based on contract value can lead to decisions that strain other areas.
Profitability: Anticipated Costs Matter
In our example, the updated budget estimates total costs and expenses at MXN $38 million against the MXN $50 million contracted. The MXN $12 million difference represents expected profit under these assumptions. Presenting this as realized profit or distributable cash would be premature.
Berman and Knight emphasize the importance of scrutinizing estimates and cost allocation. For a project, this means examining what’s included in the budget: land, construction, marketing, administration, financing, and pending obligations. It’s also key to identify which items are under contract and which remain estimates.
If a facility upgrade adds MXN $2 million to the projected cost without changing revenue, the expected profit drops from MXN $12 million to MXN $10 million. The percentage sold remains unchanged, but a dashboard focused solely on sales won’t reflect this profitability decline. Specification changes should be immediately reflected in the budget with assigned responsibility and dates, even if the invoice comes later.
Availability and Sources
This analysis is based on the preface, chapters 1 and 2, and the start of chapter 3 from the Spanish edition, along with materials from the Business Literacy Institute. The book was not read in full. Real estate examples and figures are hypothetical, created for editorial purposes, and do not reflect specific contract accounting treatments.
Liquidity: Timing is Everything
In our simplified scenario, the MXN $10 million collected has funded MXN $8 million in payments, leaving MXN $2 million. If MXN $6 million in obligations are due before the next collection, there’s a MXN $4 million cash need. The projected margin doesn’t cover this gap.
The Business Literacy Institute highlights the distinction between profit and cash, emphasizing different recognition and payment timelines. In development, this requires dating collections and construction commitments. It also means differentiating between bank balances and usable cash, as some funds may be contractually restricted.
A practical review should consider upcoming obligations. Which payments are due before the next inflow? What collections depend on deliveries or buyer financing? What happens if these dates slip? These questions should be cross-checked with treasury and those tracking physical progress.
The most valuable application of this approach is requesting three reconcilable explanations: contracted amounts, expected profitability, and available cash at critical dates. Discrepancies warrant attention before committing to new obligations or distributing resources.
Architecture, sales, and finance teams approach these numbers from different angles. When they share definitions and update assumptions for the same project, the committee can make concrete decisions: adjusting specifications, renegotiating schedules, or revising sales terms. The quality of this discussion is evident when someone can explain the source of the next payment.
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