5 Critical Numbers that Drive Your Real Estate Business
The main goal of any business is to produce a profit. Anything else and it’s just an expensive hobby.
Generating handsome bottom line, however, is not something you do by chance.
It requires that you pay attention to some key critical numbers in your business - numbers that drive great financial results for you and your team.
You don’t need a degree in economics from Harvard to understand or track them, but you do need to know what they are in order to focus on improving and then maintaining them.
Once you get a handle on what makes these numbers tick and how they impact your business, it’s simply a matter of doing the right things in the right order to get sustainable results.
It’s important to note here that you must have a good Profit and Loss statement (P&L) that you use to track your numbers.
Your P&L must be extremely detailed and account for every penny that comes and goes in your business. For example, it’s not just enough to have lead generation on your P&L, you need to break out all the different lead generation strategies you pay for and then identify the specific cost of each one so that you know exactly how much you spend on each one of them.
The more detailed it is, the more you know where your money is going and if the return you’re getting on the expense is worth it.
Quickbooks is usually the go-to software used to create a P&L and a good bookkeeper (or even your accountant) can help you prepare and maintain your P&L for reasonable fee.
Once you have your P&L locked and loaded, it’s time to get serious about these extremely critical numbers that drive your real estate business:
- Pre-tax profit: Pre-tax profit is the single most important number in your business. This number represents a company's earnings before tax as a percentage of total sales or revenues.
- Core Capital: Core capital is the amount of cash you have on hand to finance growth as well as to provide your business with a safety net to continue producing in the event that sales fluctuate significantly over a short-term period of time.
- Cost of sales: The cost of goods sold includes all the expenses that are involved in making your awesome product or delivering your incredible service.
- Gross profit margin: Gross profit margin, also known as sales minus direct costs, is what is left over after costs paid associated directly with the sale of a product or service, such as materials and direct labor, are paid for.
- Cash Conversion Cycle: The cash conversion cycle is the number of days it takes a company to turn it’s production efforts into cash.
In addition to sales growth, a company can increase profits through reduced expenditures in running its business. This should be one of your goals in increasing your profits as it’s important to grow sales while reducing expenses.
The higher the pre-tax profit margin, the more profitable the company.
The reason this number is so important is because historically, taxes are not a function of operations and to that extent, they are not included in a company’s operating expenses.
Taxes are a cost virtually every business has and as such, they shouldn’t be taken into consideration when analyzing the performance of the company.
You can legally manipulate the amount of taxes you pay and again, profit is the goal...paying taxes is not.
As well, taxes fluctuate each year due to earnings as well as tax credits and/or penalties from previous years, giving you the ability to increase or decrease earnings in each individual year.
Know this number each year and you’ll have an excellent indication of how well your business really did.
In your business’s daily operations, unexpected expenses and opportunities come up that require a rapid response from you. Without having core capital on hand, you won’t have enough money available to handle these costs.
When that happens, your business could come to a screeching halt to fix a problem or you might miss out on an ancillary source of capital or earning opportunity because you didn’t have the cash on hand to get it done.
Cash isn’t everything, but it does have a strong impact on your viability as a business, for sure.
While it’s hard to guess what could happen in the future, we recommend having at least 60 days of operating cash in an account that you don’t need to touch in order to run your business on a day-to-day basis.
That said, there’s no hard and fast rule that it shouldn’t or couldn’t be more based upon 1) your ability to set more aside and 2) your tolerance for risk in running your business.
Many times as real estate agents, we lose sight of how the cost of running our business can cut into our profitability. Hanging onto a lead source, a piece of technology or even an employee longer than we should reduces the amount of money we make in our business.
It’s crucial to know what we’re spending on everything as well as the return we’re getting on that expenditure in order to justify having it on our P&L.
In your real estate business, there are lots of costs that you incur to make it run smoothly each and every day. Here are some of the more obvious ones of which you should have a good grasp:
- Split to your broker
- Splits you pay to your agents
- Photography for your listings
- Staging for your listings
- Outgoing referral fees
- Franchise/royalty fees
- Marketing and advertising
If you don’t have a good grasp of what it costs to sell a home in your business, it’s time that you did. Not knowing could be costing you thousands.
To determine your gross profit margin, you divide the gross profit by revenue for whatever period of time you’re seeking the actual number. Then, you’ll multiply by 100 to get a percentage. For example, a gross profit of $300,000 on $1 million in revenue equals 0.3 or 30 percent.
Gross margin is a critical number because it demonstrates whether your sales are sufficient enough to cover your costs.
It’s also important to know because it is the beginning point towards generating a solid bottom-line net profit. With a high gross profit margin, you position yourself to have a strong operating profit margin and strong net income.
If your business is newer, a higher your gross profit margin means you’ll reach the break-even point - and even be more profitable - in your business faster.
More specifically, it’s a metric the tells you how long it will take you to get your money back(and make a profit) on all of your advertising, marketing and sales efforts as well as on team members who help produce sales.
It’s important to know what the cash conversion cycle is on every investment you make so that you
- Manage your budget effectively
- Get the best return on your investment in everything you do.
Failing to understand this benchmark could cost you a lot of money and hamstring your business’ ability to produce effectively to the point where it could put you out of business - for real.
Too often, we as real estate agents, take fliers on lead generation programs, products that supposedly make our business better and services that are geared towards making our businesses run better.
Unfortunately, we make these investments without taking into consideration how and when we’ll not only get our money back, but also make a profit on it.
Knowing the cash conversion cycle in these instances will ensure that you don’t ever spend money on something and not at least get your money back on it.
Donna Summer said it best: She works hard for the money...So hard for it honey. You work too hard for the money you bring in the door to not walk away with a profit.
By taking the time to understand the critical numbers that drive your business and then applying the principles of making them work, you can virtually ensure that you’ll walk away with a profit at the end of the year.
Click below to schedule a free business assessment with one of our Senior Strategic Business Advisors.