If you notice your brokerage’s expenses are higher than you’d like, three questions typically pop up:
- How do I identify those expenses?
- How do I tell if my expenses are trending in the right direction?
- What do I look for when comparing my expenses to previous years?
In today’s report, we’ll share a 5-step process that answers those questions.
Let’s begin.
Step 1: Necessities
First, you must prepare a minimum of 2 years of P&L (Profit & Loss) statements. A Profit and Loss statement shows the results of operations over the last year.
However, if you can gather more than 2 years that’s even better!
The more years you have, the more information you’ll have to analyze.
One thing you can do is use your trailing 12-month for an additional year.
For reference, here’s an example checklist:
- Trailing 12-month statement
- 2022 Profit and Loss (P&L) Statement
- 2021 P&L Statement
Once everything is gathered, identify your company dollar/gross profit for every year of P&L statements.
Step 2: The Big 3
For step 2, we’re going to identify your 3 biggest expense categories.
One way to achieve this is to systematically review your P&L statement line by line, assigning each line to the appropriate expense category it falls under.
Then once you find the total dollar amount for each category, you’re going to look for the 3 largest as they represent your 3 biggest expense categories.
Generally, the 3 biggest expense categories in a brokerage are expenses related to Salary & Payroll, Rent & Occupancy, and Advertising & Marketing. Sometimes Technology is also a major expense.
(We’ll be using these three as examples moving forward.)
Step 3: The Percentage
Now you’re going to pick 1 of the 3 expenses, take the total dollar amount for that expense, and then divide that amount by the company dollar/gross profit for the corresponding year.
From that calculation, you’re going to get a number that represents a percentage.
That percentage is called the ‘Total {Expense} as a Percentage of Revenue’.
(We went more in-depth with this in our #002 report which you can read here)
Repeat this for the other 2 expense categories and for every year of P&L statements.
Quick Recap
So far, we’ve done a lot!
Let’s do a quick recap of everything we’ve talked about so far:
- Gathered a minimum of 2 years of P&L statements.
- Identified the company dollar/gross profit for each year.
- Found the 3 biggest expense categories for each year.
- Calculated the ‘Total {Expense} as a Percentage of Revenue’ for each expense for every year.
Let’s move on.
Step 4: Start to Compare
Now that we have the ‘Total {Expense} as a Percentage of Revenue,’ start comparing that against itself from previous years.
For example:
(Note: These numbers are completely made up and not based on any real brokerage.)
Year 1
- Rent & Occupancy: 25.39%
- Salary & Payroll: 30.47%
- Advertising & Marketing: 7.01%
Year 2
- Rent & Occupancy: 27.63%
- Salary & Payroll: 32.14%
- Advertising & Marketing: 9.2%
Year 3
- Rent & Occupancy: 29.91%
- Salary & Payroll: 31.41%
- Advertising & Marketing: 11.23%
(If one year your biggest 3 expenses differ from the other years, dig into why that was/is the case.)
When you start comparing, you’re going to start noticing trends.
This is where the actionable data is found.
What trend do you notice in our example?
In our example above, the Advertising & Marketing expense has risen significantly over the years. This would be a good area to start digging into and reviewing.
Step 5: Start Asking Questions
Once you start noticing trends, it’s time to start asking questions.
We’re looking to find out why these trends are occurring.
We provided some questions for what are generally the 3 biggest expenses in a brokerage.
Rent & Occupancy
- What is my agent per square foot?
- Is my office being used effectively by my agents?
- Do I need to start thinking about upgrading or downgrading my current office when the lease ends?
There’s not a lot of opportunity for change in this category as most brokerages are bound by leases.
If you own the building and lease it back to yourself, we recommend at least leasing it at market rate as it helps with later business ventures down the road.
Salary & Payroll
- Do you have an office manager who’s been with the company for the last 25 years and now is paid above market rate? Are they potentially not as effective as before?
- Are you worried that if you let them go agents will leave?
- Do you have staff doing the exact same job in the same office?
- Can someone be reallocated to a different job within the brokerage?
Advertising & Marketing
- Is there any type of advertising/marketing campaign that you’re not getting the bang for your buck?
- Do you know if your advertising is working?
- Do you have a clear definition of what “working” looks like?
- Could you be spending less money on one type of advertising to allocate a part of it towards something else for additional savings?
For digital advertising, speak with your vendor or ad manager to get the statistics on how well your ads are performing. Make sure your money is being put to good use!
If you’re spending a significant amount on print advertising (not the cost of printing but doing full-page newspaper, or magazine ads), it may be valuable to ask yourself if this is the most effective use of your company dollar.
The ‘2023 NAR Home Buyers and Sellers Generational Trends Report’ showed that less than 1% of all buyers looked in newspapers, magazines, or home buying guides as their first step taken in the home buying process. [1]
Summary
In short, you’ve gathered A LOT of actionable data with this exercise.
But now it’s time to start deciding what expenses you need to cut, not cut – or maybe even increase!
As this report is already on the lengthy side, we’ll dive more in-depth into the decision-making process in Part 2.
In Part 2 we’ll introduce a decision-making process (using the Invisible & Visible quadrant) that helps decide which expenses to cut vs. not cut, in a clear and direct manner.
See you then.
Sources
[1] – https://www.nar.realtor/sites/default/files/documents/2023-home-buyers-and-sellers-generational-trends-report-03-28-2023.pdf
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