If you’re leading a small brokerage of your own or managing an office in the corporate fleet, you are responsible for reviewing a mountain of paperwork on a daily basis. Like, transaction files, contract amendments, independent contractor agreements, MLS agreements and notices from your state commission.
If you are an owner, those documents expand to every vendor: landlord lease, service providers, website agreements and a whole lot of back and forth between you and your CPA.
Each of these documents merit careful attention. But there is one document that most of us are willing to gloss over, consistently moving it to our get-to-it-later piles. In fact, we may just delegate it to the CPA. It’s confusing at first, scary at times and never good enough for any of us.
The most important document for a manager or broker-owner is the P&L, or in other words, the profit and loss statement. It’s the score card of business and the prophet of your future that hopefully reflects the profit of your labor. If you’re scared to master the category codes, multiple columns and diverse numbers, it’s time to look that P&L right in the rows.
Many brokers measure success by high sales volume, a large agent count or an outstanding number of transactions. Just so you know, there are companies and offices in your market that score high on one or all of these categories — and they are losing money.
P&L statements expose what goes on with a business in clear and sobering light. You don’t need to hear about the status of employees, the rank of the branch or interview the owner to know what’s going on with a brokerage. Just hand over the P&L statements to get the real story.
In very simple terms, the P&L reports revenue (what you collect in commissions and other sources of income like agent fees) and what you have paid in expenses (including commission shares to agents). The difference between those numbers is profit or loss.
So what can we learn from the P&L statement? Start with these areas:
Profit or loss?
Did you take on ownership to see how many agents you could recruit? Did you become a manager to have the highest sales volume in your company?
It’s easy to get caught up in those measures when they define the trophies. Smart owners and successful managers focus on profit. It’s odd, but I have yet to attend an awards ceremony where they acknowledge the most profitable office or company. Maybe they should.
Before you flair up about community service, culture and passion — all topics I love and work to deliver in my own business — let me remind you that we don’t get to provide community service, culture or passion without having profit to undergird those efforts. Private equity, multiple investors, your own bank account and the spouse you share a life with will all eventually require profit for you to continue to play.
Knowing your P&L allows you to make adjustments — often quickly. If $500 of web marketing returned three leads, two sales and $20,000 in commission to the firm over the past reporting period, then it’s wise to invest even more in that activity.
Likewise, if the copier contract costs $750 a month, it may be time to renegotiate. You can identify the opportunities to grow returns and cut costs from careful study of your P&L.
Negotiating equitable splits with agents is essential to success in brokerage leadership. Deep in the weeds is a metric called “retained company dollar” or Retained CO$. Let’s make it easy. Retained company dollar is how much money you have to run the business after you collect all income and pay the agents.
The P&L makes it easy to identify that amount and even to consider it as portion of overall revenue. Retained company dollar might be $10,000 for the month, but is that good or bad? It depends.
If $10,000 reflects 28 percent of your total income, you’re doing pretty good on the ratio. If it’s 5 percent, then you probably won’t be in business much longer as a small or midsize company. For now, know that the P&L reveals valuable stories that you can extract.
The retained company dollar category in particular, reveals what kind of agents you should recruit next. If the percentage is low, improve it by recruiting new or unproductive agents you can quickly advance. If the retained company dollar is high, then you have room to chase a high producer with a high split while capturing additional market share for your firm.
Nobody’s perfect. The key is to keep improving. One component of a P&L is to compare your performance this week, month, quarter and year with the same period of time in the last year or several years.
Market conditions influence this category, but so do you. Your leadership, wisdom and understanding of the P&L are a part of how you continue to improve the performance of your brokerage or office. So, know your numbers.
There’s a long way to go to mastering P&L. My first monthly P&L made me nauseous. The second made me cross-eyed, but after the third one, I discovered we were paying too much for coffee. Every month since then, I’ve sharpened my insights for gain in managing the business. You can, too.
Remember, your P&L is your business report card. It’s the heart monitor of your business. It’s the speedometer of your car. Take one of those metaphors, and make it work for you. Pay attention every week, month, quarter and year to what your P&L statement is teaching you about your business. You’ll be better for it.
Kevin Woody is a real estate brokerage consultant and former CEO at Better Homes and Gardens Real Estate Paracle. Connect with him on LinkedIn and Facebook.