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Running a successful business takes skill, hard work and planning. You can chase every lead in the world, but if you can’t manage your finances, you won’t be successful.
To help you be in good health when it comes to the financial situation of your real estate business, we reached out to agents, brokers and tax advisors for advice on creating, maintaining and optimizing your budget. Here’s what they had to say:
Review past finances and set a budget
Before you can set a budget, you need to know what you can spend, which means analyzing the cost of doing business and how much commission you will earn. CPA, Aaron Lesher breaks it down like this:
- Income: Your commission plus any other income you generate from referrals, brokerage profit sharing, or coaching.
- Expenses: All business expenses you incur in running your business.
- Profit: Profit is income minus expenses (which is also the number to start with when calculating your tax bill).
Lesher advises to sit down and figure out your expenses first. Take out a sheet of paper and total your income and expenses for the past month; use an online bank statement as a reference.
Next, divide your expenses into five broad categories, such as advertising, vehicle, office, professional fees, and insurance.
“Once you’ve done this…you’ll have a rough idea of your biggest spending items and your monthly profitability (or loss), which can then be used to create a realistic budget based on your situation and goals. revenue and profitability,” Lesher said in an email interview.
“Think like a business owner,” Erica Ramus, broker/owner of RAMUS Realty Group, said in an email. “You need to know where your income comes from and where it goes.”
She suggests creating a spreadsheet or using Quickbooks to track all of your expenses, including marketing, MLS and dues, auto, insurance, and your incoming income.
QuickBooks advises you to also separate your fixed and variable expenses. Fixed expenses are those that stay the same from month to month and variable expenses are those that change. Look at your variable expenses for places where you can cut fat or switch departments.
Plus, pay yourself a salary – a fixed business cost that covers your cost of living. And don’t forget to set aside money for taxes. Come April 15, you don’t want any surprises, so set aside about 40%.
Do a regular “budget review” to stay accountable
“Creating a budget is great, but it means nothing unless you regularly review your actual numbers against it. Review too frequently and agents don’t see progress; too infrequently and officers can’t make necessary changes if they veer off course,” Lesher said.
Ramus recommends looking at your budget quarterly rather than annually as this will make it easier to make adjustments if needed.
Lesher goes one step further: “Set a recurring calendar reminder once a week for budget review. Make it as boring as possible so it’s not easy to ignore. This simple reminder will do wonders to hold you accountable to your budget goals and provide frequent positive (or negative) reinforcement to keep you from straying too far off track.
Don’t waste money on small purchases that add up
“One of the biggest mistakes I see agents make is wasting their money bit by bit. They don’t necessarily blow the budget on big items, but they won’t hesitate to drop a number of small purchases without thinking too much about it,” Ramus said.
Small purchases, like wasting $250 on a print campaign that doesn’t have targeted demographic research to back it up, add up over time, which is why doing this budget review is essential.
Track your ROI — and adjust
Remember that a budget is not fixed for life, or even for a year for that matter. If you find that something isn’t working or you’re not seeing the ROI you expected, change it.
“Make a strategic decision about what is important to you. Expenses must generate income. If an expense is not creating income, it should be eliminated,” Tom Wheelwright, CPA and CEO of WealthAbility, said in an email.
The key is to spend money wisely, not on a whim, Ramus said. Track all your expenses and regularly evaluate all your marketing tools.
“Look at what marketing spend is actually bringing a positive result,” she said. “A relatively expensive marketing expense may be justified if it brings in more money than it costs.”
Ramus also warns that what works now may not work a year from now, so you need to assess where your leads are coming from and which are driving closures. You also need to remember that what works for one agent may not work for you.
Reinvest extra money in your business
If you find that you have a little extra coin after calculating your profitability, Lesher recommends that you reinvest it in your business.
“Besides living expenses, the smartest way to spend your commission checks is to reinvest in your business,” he said. “Basically it means spending money on things that will increase your sales.”
Think about the tasks that weigh you down, the ones you hate doing, and look for ways to outsource and automate those things so you can focus on more revenue-generating tasks.
Email Dani Vanderboegh