One of the most common questions that broker/owners ask is this: “What numbers should I look at?” This is an intensely personal question since it goes to the root of what type of operation you are running. The goal in this article is to guide you to some key numbers you should have a handle on.
First let's agree on one thing, you need an up-to-date, accurate, financial statement. Your financial statement is your roadmap to financial health, read it like you are going somewhere! You don't go on a trip without planning your route and tracking your progress. So why would you treat your company any different. Having accurate and timely financial statements is the key to financial health. Finding out how you did in your last fiscal year when your CPA gives you statements six months later is useless. The information is out of date and not relevant to what is currently happening in your business. So the first number that you should look at is your current financial statement. And it must be in a format that you can read. A statement that shows the most recent twelve months of activity is critical. This is what will allow you to spot trends and get a feel for what direction things are heading. The financial statements that your CPA gives you, with a column for last year and a column for the current year might be required for your income tax return but they do little to help you understand the flow of your business. Only a spreadsheet type twelve month statement will do this. And the year-end date of your company doesn't matter here either, you need to see the most recent 12 months, regardless of fiscal year they fall in. The fiscal year is just a convention created by the government and accountants to fit your numbers into a nice neat slot for them, not to help you run your business.
Now that you have a statement, the next thing to do is create a budget to go with it. This will help you plan where you expect your statements to go and then matching them up to results will help you understand what worked and what didn't. We'll cover budgets in a different article but these are critical.
The most important line on your financial statement to look at is the amount of income retained after paying your agents. What this means is that how you pay your agents is not important, it's how much you keep that is. Whether you compensate with splits, transaction fees or desk rents, that is just how you carve the pie up. You need to understand what you keep out of every dollar that comes in. This is the money that you have to run your business with.
While I stated above that how you compensate your agents is not important, what is important is monitoring how they are doing. Once you have decided on how to compensate, the challenge is to make sure that they hold up their end of the deal. A desk rent office and a traditional split office have different needs when it comes to the numbers required to understand where they are heading.
Traditional Splits: Look at a production report that monitors their progress in their split. If you hire an agent at 80/20 up to $100K you expect to get $20K from them that you will use towards running your office. If six months into the year they have only produced $30K, you have received $6K instead of the $10K you were expecting, leaving you $4K short towards paying your bills. If this continues to year-end and you end up $8K short, what will you do? Add it on to next year, expect the agent to pay up, find a supplier who will cut their bills or kick the money in yourself? How about staying on top of their progress, sitting down with them at the 6 month mark and saying; “80/20 is not working so I'm going to have to roll you back to 60/40”. If they continue at the pace they are going the new 60/40 split will get you back up to the company dollar that you expected. Sure they won't be happy but the question is this, do you want to deal with this challenge now or in 6 months. Either way, deal with it you must!
Desk rents: Look at an analysis matching their expense balances against what they have in production. Who is a bigger concern to you, an agent owing $2K with $10K in pending deals or an agent owing $1K with no pending deals. On a normal A/R listing you would look at the $2K agent first and this would be wrong. They are not your bad debt problem, the $1K agent is!
Regardless of the compensation plans above, the next number that you need to review is a pending transaction report that shows what you have coming. Separated by month, you should be able to see, through a combination of splits, deal fees and desk rents, what you have coming in each month. If your monthly overhead is $200K then you should know now what you will receive next month, the month after and etc. If you are going to be short $25K next month, you need to know that now, not in 60 days when vendors are not paid and your back is against the wall.
The numbers above will help you know where you have been, where you are going and how you will get there. The shortness of this article means that we can't discuss lots of other numbers that you could be looking at but paying attention to any number is better than not paying attention at all.
Lorne C. Wallace C.A. is the CEO of Lone Wolf Real Estate Technologies, a company with over 9,000 offices utilizing its software to administrate and manage their real estate operations. firstname.lastname@example.org