How to Calculate your Lease Cash Flow Analysis – Excel Template
Last Updated on May 31, 2023 by Morgan Beard
If you are a commercial tenant, finding the right space for your business is crucial to your success. But there’s more to consider than just location and size – you also need to understand the financial implications of leasing a commercial property. Knowing how to calculate your cash flow analysis is a key element in determining whether a lease is financially viable, and it can help you make informed decisions about your space.
Finance and real estate accounting teams know that cash flow is king. And if your brick & mortar real estate strategy is both a revenue center and a cost center, then understanding cash flow analysis is important. We will explore the basics of healthy cash flow analysis for commercial leasing and show you how to use an Excel template to perform accurate calculations.
Whether you’re a small business owner or a growing enterprise, this post will provide valuable insights that can help you make informed decisions about your commercial real estate space. So, let’s dive in and explore the world of commercial leasing cash flow analysis from a tenant’s perspective!
The Importance of Accurate Cash Flow Analysis
As a commercial tenant, it’s important to understand the financial implications of leasing a commercial property. One key element to consider is cash flow analysis, which is used to determine whether a lease is financially viable. Accurate cash flow analysis can help you make informed decisions about your space, and it’s crucial to the success of your business.
But what exactly is cash flow analysis, and why is it so important? In short, cash flow analysis is a financial tool used to estimate the amount of cash that will flow in and out of a commercial property over a given period of time. This analysis takes into account a variety of factors, including rent payments, operating expenses, debt service, and more. By performing accurate cash flow projections, you can gain a clear understanding of the financial implications of a commercial lease and make informed decisions about your space.
Components of Commercial Leasing Cash Flow
Cash flow analysis is an essential component of financial management, not just for your regular business activities but your commercial lease portfolio as well. Essentially, it’s a way to track the movement of money into and out of your leased assets. Allowing you to identify potential negative operating cash flow problems and make informed decisions about your company’s real estate and equipment lease portfolio.
In order to perform a cash flow analysis, there are three primary components: net cash flow, cash inflows, and cash outflows. These components help tenants evaluate the potential income and expenses of a commercial lease:
Net Cash Flow:
Net cash flow is the difference between cash inflows and cash outflows over a specified period. In other words, it is the cash that remains after all lease liabilities and lease expenses are subtracted. This provides tenants with an estimate of how much liquidity is available after all leasing related transactions and operating expenses have been completed.
Cash inflows are the estimated cash payments received from a commercial property. From the commercial tenant perspective, cash inflows are related to revenue or cash received as a result of your leased property. So if you are a retailer or restaurateur then examples of this can be in the for of revenue:
- Cash received from sales of goods or services
- Cash received from on-premise events
- Subleasing a portion of your space
Cash outflows are the estimated cash payments required to operate the commercial property. Keeping the lights on and your storefront of office space open and running has numerous expenses associated with the commercial lease:
- Lease payments
- Utilities and maintenance expenses
- Employees’ wages and bonuses
Your commercial leasing cash flow analysis could include preparation of three separate cash flow statements: operating, financing, and potentially investing if an investment strategy is part of your overall commercial real estate portfolio. These financial documents outline your net profit when integrated with your P&L Statement. Understanding your operating cash flow margin ratio indicates the success of your company’s core business activities. Let’s dive into cash flow statements.
Industry Standard Deductions in Commercial Real Estate
As a commercial tenant, understanding industry standard deductions in commercial real estate cash flow analysis can help you make informed decisions about leasing and budgeting. These deductions are expenses that are typically deducted from the rent you pay as a tenant, and they can vary depending on the type of lease agreement you have.
One common deduction is for operating expenses, which includes costs like maintenance and repairs, property management fees, and property taxes. Typically, commercial leases are structured so that tenants pay a proportionate share of these expenses based on the size of their leased space. Understanding how these expenses are calculated and what portion you are responsible for can help you budget more effectively and negotiate a lease agreement that is fair and reasonable.
Another important deduction to consider is for tenant improvements, which are modifications or upgrades to the leased space that are made specifically for your business needs. These improvements can include things like installing new fixtures, painting walls, or adding new flooring. Understanding the terms of your lease agreement and what tenant improvements are included can help you plan for any associated costs and ensure that the space meets your business needs.
Performing a Cash Flow Analysis: Everything You Need to Know
To perform a cash flow analysis you’ll need to prepare three separate cash flow statements: operating, investing, and financing. Most businesses use their accounting software to generate these statements, but there are also free templates available if you prefer to create them manually.
Preparing an Operating Cash Flow Statement
There are two common methods used to calculate and prepare the operating activities section of cash flow statements: the direct method and the indirect method. The direct method takes all cash collections from operating activities and subtracts all of the cash disbursements from the operating activities to get the net income. The indirect method, on the other hand, starts with net income and adds or deducts from that amount for non-cash revenue and expense items.
The first step in preparing a cash flow statement is to create an operating cash flow statement. This statement includes all of the line items that factor into your company’s net income, such as cash received from sales of goods or services, employee wages and bonuses, payments to contractors, and utility bills, rent, or lease payments. It also includes interest paid on loans and other long-term debt, as well as any fines or cash settlements from lawsuits.
Investing & Financing Cash Flow statements
Once you’ve prepared your operating cash flow statement, it’s time to move on to the investing and financing cash flow statements. The investing cash flow statement calculates the bottom line by adding the money received from the sale of assets, paying back loans or selling stock, and subtracting money spent to buy assets, stock, or outstanding loans.
Finally, the financing cash flow statement tracks the movement of money between your company and its owners, investors, and creditors. This includes any money your company receives from loans or investors, as well as any payments made to repay loans or distribute dividends to shareholders.
Commercial Leasing Cash Flow Statement Template – Excel
While performing cash flow analysis for commercial leasing can be complex, an Excel template can help simplify the process. By using an Excel template, tenants can easily input the necessary data and perform accurate cash flow analysis in a matter of minutes. These templates often include pre-built formulas and calculations, making the process of analyzing a commercial lease much simpler and more efficient.
Here are the steps for using an Excel template to perform cash flow analysis for commercial leasing:
- Gather the necessary data: To use an Excel template for cash flow analysis, tenants will need to gather data such as rent, utilities, property taxes, and other expenses.
- Input the data: Once the data is collected, input it into the Excel template in the appropriate fields.
- Review the calculations: The Excel template will automatically calculate the net cash flow, cash inflows, and cash outflows based on the data provided. Review the calculations to ensure accuracy.
- Evaluate the results: Review the results of the cash flow analysis to determine whether the commercial lease is financially viable.
Long-term business investments like real estate leases have a substantial impact on your balance sheet, profit and loss statement as well as overall company performance. Understanding your commercial lease cash flow and cash balances helps provide transparency to your financial obligations and the overall health of your business operations. Ultimately, a cash flow statement enables you to answer questions like:
1. What decisions about my lease portfolio do I need to make if the model predicts a cash flow shortfall?
2. Do our current liabilities due in the upcoming accounting period allow for sufficient capital expenditures?
3. Does my business’s long-term investments support business growth?
4. How can we invest excess cash if we have it?
Strategize your real estate expansion goals by analyzing your lease cash flow for a given property. Here at Occupier, we empower commercial tenants to make smarter investment decisions as it relates to their real estate portfolio. Schedule a demo with an Occupier team member today to see how you can scale your footprint efficiently and effectively.
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