Is gross commission income (GCI) the top metric you use for assessing your real estate business? While GCI plays an essential role in gauging how much you’ll earn in real estate commission and if that will cover expenses, a profit and loss statement, also known as a P&L statement, is a better indicator of the fiscal health of your real estate business. When you understand a P&L statement’s key metrics – profits, costs, and expenses – you’re empowered to ask tough questions about your revenue, operating expenses, and financial activity.
Without the services of a dedicated financial advisory team, many business owners check their P&L statements but still fail to strategically use this financial report to drive profits and growth. PLACE has found that the most highly-profitable teams use a P&L statement to take a more well-rounded approach to assess fiscal health and set business activities and goals.
To better gauge the financial health of your real estate business, PLACE Chief Financial Officer Suzanne Colvin and her team have provided six tips for understanding a P&L statement below.
6 Tips for Understanding a Profit and Loss Statement
Tip # 1: Set a profit target
The first step is to set the profit amount you hope to achieve annually. Anywhere between a 50 to 60% profit margin for an individual real estate agent is common. As your business expands and your team grows, revise your profit market target to 30 to 40%.
If your goal is to become more profitable, put yourself on the payroll and live on a fixed budget. Split your commission and reinvest half into your business to identify the price of transitioning from a full-time producing agent to a team leader. For example, when PLACE’s Co-Founder, Chris Suarez, first started his real estate business, he ran it as if he was a team and put himself on a commission split, allocating 10% to leverage (systems, tools, people, and virtual assistants, marketing, CRM) and an additional 10% to lead generation in his operating account. With this approach, he also helped attract talent, as agents had the same potential net profit margins as the real estate business as a whole.
Tip #2: Take a deep revenue dive
- How does my GCI compare to what I budgeted, and if there is a variance, why?
- What is my ratio of list vs. buy units for the month and the year?
- What training does my team need to focus on more profitable listings?
- What was the overall team commission percentage this month and year-to-date?
- What is my average selling price year-to-date, and how does it compare to last year?
Don’t take your real estate GCI at face value. Instead, ask yourself these five questions to understand what is driving this metric and identify areas for improvement:
Tip #3: Know your costs
Understanding a P&L statement means knowing what money is going out the door and how it affects your bottom line. Use these four questions to help set your record straight:
- Am I paying reduced commission splits for appointments set by the team?
- Based on my agent splits and regular business expenses, are referral fees worth what I pay?
- Does the value from my brokerage justify its costs, and have I hit my brokerage fee cap?
- Is my gross profit at 50% or better, and how many of my agents’ monthly transactions were on <50% splits to the team?
Tip #4: Dig into your operating expenses
Go through your expenses in detail by printing out the P&L statement, and as you go through it, be alert for monthly or yearly recurring charges. Ask yourself these six questions:
- Which of my expenses could be reduced or eliminated in a low-production period?
- Am I personally authorizing/approving new expenses before they are incurred?
- Do any expense jumps stick out, or do you notice any unfavorable trends over the past 12 months?
- How does my current month compare to my year-to-date in each spending category?
- Which of my expenses are known revenue-producing activities?
- Are my staffing expenses what I expected, and are my employees and contractors aligned with those expectations?
Tip #5: Don’t forget the odds and ends
Look at yourself, team growth, and lead generation. When you assess this part of your real estate business, here are important considerations to keep in mind:
- How many agents were productive in the month, and how much did I contribute to the team production?
- What is my team’s trend in agent count?
- How much time am I devoting to agent recruiting daily?
- How much am I spending on leads; how quickly is my team initiating follow-ups and converting them into transactions?
- Is every client in my database set up to receive a listing alert or market report?
- Am I taking full advantage of my real estate tech?
Tip #6: Stay consistent
Set a goal to review your P&L statement each month and focus on growth and profitability. Stay true to your targets, and use your review to determine when to go full speed ahead and when it may be time to pull back.
Discover how a PLACE Partnership takes your business to the next level.
If you want more support managing expenses, understanding your profit and loss statement, and increasing profitability, fill out this form to tell us more about your business. PLACE and its accounting professionals help partners develop a plan to improve operations and financial performance. Watch our partners discuss their success with PLACE here.