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Real estate agents face a harsh financial reality: The median gross earned income of Realtors from real estate activities was $55,800 in 2023. According to an often-cited study published in Forbes and Business Insider, 82 percent of businesses fail due to poor cash flow management or a lack of understanding of cash flow.
Even successful agents often struggle with the feast-or-famine cycle, watching commission checks arrive only to be consumed by business expenses, fees and interest, leaving little for the agent who generated the income.
Enter the Profit First methodology. Profit First is a cash management system that’s transforming how real estate professionals manage their finances. Created by entrepreneur Mike Michalowicz, Profit First is used by hundreds of thousands of companies worldwide to drive profits. The system flips traditional accounting on its head, ensuring agents pay themselves first rather than hoping something’s left over. (It also helps with taxes, so keep reading.)
Why real estate agents need this now
The commission-based nature of real estate creates unique cash flow challenges. Even experienced agents face irregular income streams that make conventional budgeting and accounting nearly impossible. Traditional business accounting follows the formula:
Sales – Expenses = Profit
This leaves profit as an afterthought. Profit becomes whatever remains after covering all business costs, which is often $0 and sometimes even negative.
The Profit First formula takes a different approach, inverting the standard profit calculation. Instead of seeing profit as what’s left over, the Profit First formula allocates revenue to profit and then uses the remaining funds to cover expenses. The Profit First formula is
Sales – Profit = Expenses
The 5-account system that changes everything
The Profit First system requires opening five separate bank accounts and allocating percentages of each commission check as follows:
- Revenue account: Where all commission checks initially land before being distributed.
- Profit account: Your reward for being a business owner. This is never touched except for quarterly distributions to yourself.
- Owner’s pay: Your regular salary, the money you live on. Use the baseline described below to establish a steady income and achieve greater financial stability in your personal life.
- Tax account: Funds set aside for tax payments. Be sure you’re not scrambling at tax time.
- Operating expenses: Money for marketing, technology, transportation, staff and other business costs
For each full-time employee, your company should generate real revenue of $150,000 to $250,000 (ideally more, but this is the minimum). For solo agents, this benchmark helps determine if your business model is sustainable.
Also, don’t let your bookkeeper fool you. The extra time to input five bank accounts is minimal (less than five minutes per month usually), but the time and money saved knowing your numbers easily is priceless.
Implementing profit 1st in your real estate business
Start small, think big: Begin by allocating just 1 percent to your Profit Account.“If you get a $1,000 deposit, transfer $10 into your PROFIT account…You’ll never miss that 1 percent,” Michalowicz writes. Gradually increase percentages as you optimize expenses.
Calculate your baseline: Look at your slowest three months, and average them out. “That is the lowest your revenue will likely ever go,” Michalowicz explains. Once you know this, you can use that as a baseline for calculating your owner’s pay. This becomes your steady paycheck, even during slow periods.
Automate the process: Set up automatic transfers, or block your calendar twice monthly on the 10th and 25th of each month. Transfer the funds in your revenue account to your remaining accounts according to their respective percentages.
The psychology behind the system
The beauty of Profit First lies in its behavioral approach to money management. When you see a smaller balance in your operating expense account, you naturally become more creative and efficient with spending. This constraint forces you to question every expense: Is this marketing campaign essential? Is there a more cost-effective technology solution available?
Sixty percent of SMBs cite ineffective cash flow management as a major challenge, yet many agents have never implemented a systematic approach to managing their finances. The Profit First system provides that framework.
Real-world results
Agents implementing Profit First report several benefits:
- Consistent income: Regular owners’ pay eliminates the stress of irregular commission cycles.
- Tax preparedness: No more scrambling to find tax money at year-end.
- Business growth: Forced efficiency in operating expenses often leads to higher profit margins.
- Peace of mind: Knowing money is allocated for specific purposes reduces financial anxiety.
Common pitfalls to avoid
Don’t rob Peter to pay Paul: Resist the temptation to “borrow” from your Profit or Tax accounts during slow months. This defeats the system’s purpose. One of the beauties of Profit First is its adaptability to unique businesses.
For example, real estate agents could consider seasonal adjustments. Adjust allocations according to your market’s seasonal trends. During the winter, you could have more allocated to owners’ compensation, and during the summer, you could have more allocated to taxes and operating expenses.
Intentionally implementing seasonal adjustments is very different than robbing Peter to pay Paul when you’re in a pinch. The former is a creative solution. The latter shortcuts your creativity.
Start where you are: Don’t wait until you’re earning more to implement the system. Small businesses that monitor cash flow monthly have an 80 percent survival rate. Even a 1 percent allocation to profit or taxes can be life-changing.
As you see results, adjust your allocations by 1 percent to 3 percent per quarter until you reach your target. Additionally, implementing Profit First has just become easier with the recent release of the Profit First app.
Your path to financial freedom
The Profit First system isn’t just about managing money; it’s about managing your finances effectively. It’s about changing your relationship with business finances. By paying yourself first, you ensure that your hard work translates into personal wealth, not just business revenue.
Take action today: Open your five accounts this week. Start with conservative allocation percentages, and adjust as you gain experience. Your future self will thank you for taking this crucial step toward financial stability and wealth building.
The real estate industry will always have its ups and downs, but with Profit First, you’ll have a system that ensures you profit regardless of market conditions. Stop leaving your financial future to chance. Implement Profit First and start building the wealth you deserve.
Amanda Neely is a Certified Financial Planner with Wealth Wisdom Financial. Connect with her on LinkedIn.
