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Running a business successfully takes skill, hard work and planning. You can chase all the leads in the world, but if you can’t manage your finances, you won’t succeed.
To help you have a clean bill of health when it comes to the financial state of your real estate business, we reached out to agents, brokers and tax advisers for advice on creating, maintaining and making the most of your budget. Here’s what they had to say:
Look at past finances, and set a budget
Before you can set a budget, you have to know what you can spend, which means parsing out the cost of doing business and how much you’ll earn in commission. CPA, Aaron Lesher breaks it down like this:
- Revenue: Your commission plus any other income you generate from referrals, brokerage profit share or coaching.
- Expenses: Any business expenses you incur related to running your business.
- Profit: Profit is revenue minus expenses (which is also the number to start with when calculating your tax bill).
Lesher advises sitting down and figuring out your expenses first. Get out a sheet of paper, and total your income and expenses from last month; use an online bank statement as a reference.
Then divide your expenses into the five biggest buckets, like advertising, vehicle, office, professional fees and insurance.
“Once that’s done … you’ll have a rough idea of your biggest areas of expenses and your monthly profitability (or loss), which can then be used to create a realistic budget based on where you’re at and what your goals are for revenue and profitability,” Lesher said in an email interview.
“Think like a business owner,” said Erica Ramus, broker/owner of RAMUS Realty Group, in an email. “You need to know where your income is coming from and where it is going.”
She suggests creating a spreadsheet or using Quickbooks to keep track of all of your expenses including marketing, MLS and dues, automobile, insurance as well as your incoming revenue.
QuickBooks advises that you also distinguish your fixed and variable expenses. Fixed expenses are those that stay the same month to month, and variable expenses are those that change. Look at your variable expenses for places to trim the fat or switch services.
Also, pay yourself a wage — 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 tuck away around 40 percent.
Do a regular ‘budget review’ to stay accountable
“Creating a budget is great, but it doesn’t mean anything unless you regularly review your actual numbers against it. Review too frequently and agents can’t see progress; too infrequently and agents can’t make changes as needed if they get off course,” Lesher said.
Ramus recommends looking at your budget quarterly rather than annually because it will make it easier to adjust when necessary.
Lesher takes it a step further, “Set a recurring calendar reminder once a week for budget review. Make it as annoying as possible so it’s not easy to ignore. This one simple reminder will do wonders in terms of holding you accountable to your budget goals and provide frequent positive (or negative) reinforcement to avoid getting too far off track.”
Don’t waste money on small purchases that add up
“One of the biggest mistakes I see agents making is throwing their money away in dribs and drabs. They don’t blow the budget on large items necessarily — but they won’t hesitate to drop a number of smaller purchases without thinking about it too much,” Ramus said.
Small purchases, like blowing $250 on a print campaign that doesn’t have target demographic research to back it up, add up over time, which is why it’s critical to do that budget review.
Track your ROI — and adjust
Remember that a budget isn’t set for life, or even a year for that matter. If you find something isn’t working, or you’re not seeing the ROI you’d expect — change it.
“Make a strategic decision about what is important to you. Expenses should create income. If an expense doesn’t create income, it should be eliminated,” Tom Wheelwright, CPA and CEO of WealthAbility, said in an email.
The key is to spend money intelligently, not on a whim, Ramus said. Track all of your expenses and evaluate all of your marketing tools regularly.
“Take a look at which marketing expenses actually bring a positive result,” she said. “A relatively expensive marketing expense may be justified if it brings in more money than it costs.”
Ramus also cautions that what works now may not work a year from now, so you must evaluate where your leads come from and which ones generate closings. You also need to remember that what works for one agent may not work for you.
Invest extra money back into your business
If you find that you have a little extra coin after working out your profitability, Lesher recommends putting it back into your business.
“Aside from living expenses, the smartest way to spend your commission checks is to reinvest in your business,” he said. “Fundamentally this means spend money on things that will increase your sales.”
Think about those tasks that weigh you down, the ones you hate doing, and look for ways to outsource and automate those items so that you can focus on more income-generating tasks.