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Budgeting |
| The orderly process of organizing data
to be analyzed in a meaningful way to see
trends and variances within the operation of
the organization. Generally, budgeting is
synonymous with planning for profits. The
most accurate budgets are developed using
several years of historical data. |
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| Budgeting Tips |
| Real estate brokerage budgeting can
represent significant challenges. The high
mobility of sales staff, aggressive
commission plans, fluctuating economic
conditions, marketplace trends, competition
within the market area, and other unique
internal and external influences all take
their toll on the rational process of
estimating expenses and forecasting cash
flows. |
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| Budget Worksheet |
| A range of budget worksheets are used by
brokerages owing to differing internal
practices, particularly in regard to
salesperson compensation plans and
allocation/recovery systems involving
expenses. |
| |
| Income Analysis |
- Commission Income:
Can be divided into residential,
commercial, or other categories as
required. A similar change should then
be made in the Commission Expense
category to mirror this alteration:
i.e., Commission to Salespeople (Res.),
Commission to Salespeople (Com.).
- Referral Income:Income
received from outgoing referrals.
Minimal expense is incurred to generate
this revenue, so it is an interesting
category to assist with bottom line
results.
- Contribution of Owner:
Isolating the owner’s income and
expenses provides a more complete
picture of the brokerage’s financial
strength. Further, this figure is
typically removed for purposes of
override payments to a manager. The
worksheet provides a corresponding
category isolating the owner’s payout
under commission expense so that
brokerage performance can be analyzed
separately.
- Other Income:
Refers to property management,
appraisal, and other incidental income.
It provides an account for miscellaneous
revenue sources so that pure commission
income is accurately isolated for
analysis and tracking purposes. A more
detailed set of accounts is required
with brokerages having specific
departments. Other Income can also
include penalties and interest charges
on overdue salesperson accounts.
- Desk Fee Income:
All income from desk fee arrangements is
entered on this line. This would apply
to total desk fee offices as well as
offices providing variable plans that
have one or more persons on a desk fee.
- Commission (Other Brokers):
This payout factor is an important
aspect of management analysis. Higher
payouts can be a signal of weakened
market position.
- Referral Commission (Other
Brokers):
This referral payout references monies
received to which referral cheques must
be issued to other brokers. The total
income received is not specifically
isolated: it is included in Gross
Commission Income. However, it is
possible to estimate total income
generated from such referrals by merely
grossing up the figure. For example:
Referral Commission to Other Brokers:
$4,500, Usual Split: .25 of Gross;
therefore, estimate of gross income
generated by incoming referrals: $4,500
÷ .25 = $18,000.
- Adjusted Gross Income:
This is the basis for comparison of
expenses to gross income. The adjusted
gross is used as it is a pure figure of
income to the brokerage, no other
brokerage dollars are involved.
|
| Expense Analysis |
| The accounts have been organized for
ease of use in establishing percentages for
month-to-month comparisons. The brokerage
may organize these accounts to meet specific
needs. The main expense divisions follow. |
- Commission Expense:
This figure is a reflection of the
commission and bonus plans in place.
Comparisons using this category are
important for internal purposes.
However, analysis between companies is
difficult. Ranges of commission payout
will vary considerably based upon
internal arrangements: i.e.,
salesperson’s participation in various
expenses, payment of desk fees etc.
- Advertising Expense:
The categories provided cover most
advertising media usual to a real estate
brokerage. Other classifications should
be added as required. Detailed analysis,
by individual newspaper for example, may
unnecessarily complicate the worksheet.
- Personnel Expense:
Ensure that all EI and CPP expenses are
included as well as Employer Health Tax.
Owner’s salary should be isolated and
full and part-time staff should be
separated to better analyze costs.
- Occupancy Expense:
If owner-occupied, the rent should be
the economic rent for the premises.
Additional categories may have to be
added in relation to upkeep and repair.
- Communication Expense:
Telephone expense is broken into two
parts for recovery of toll charges from
salespeople. Additional blank expense
classifications are provided to be used
as required.
|
|
Operating and General Expenses |
| Confusion exists over the division of
expenses beyond the main categories of
commission, advertising, communication, and
occupancy expense. Brokerage accounts will
include such categories as: Selling Expense,
Sales and Promotion, Administration Expense,
Sales and Marketing Expense, etc. This
causes confusion and compounds the process
of analysis. In the recommended financial
worksheet, only two general categories
exist. |
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| Operating Expenses:
Operating expenses vary with the sales
production of the brokerage. These variable
expenses may or may not be recovered from
salespeople, depending on the specific
compensation plans being utilized. The
budget worksheet lists nine different
categories. Items should be added or deleted
as required. Franchise fees are included in
this category as most are calculated on a
production or per person basis. Errors and
Omissions insurance relates specifically to
salespeople and is included. All production
related charges from the real estate board
are included with the exception of brokerage
membership dues. |
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| General Expenses:
General expenses vary only slightly with the
production of the brokerage. They tend to be
fixed and somewhat predictable on a
year-to-year basis. Normally, most
owner-related expenses would appear in this
category. The worksheet provides twelve
different items. Professional fees relate to
accounting and legal costs. Licences refer
to operating licences for the brokerage
only. Automobile expenses relate to
brokerage vehicles and associated costs.
Bank charges involve penalties, charges, and
related costs owed lending institutions.
Depreciation is included for all owned
equipment. The general expenses are viewed
as overhead and are either paid through the
broker’s portion of income or offset by
appropriate desk fees. |
| |
| Example 1
of
General and Operating
Expenses |
| The photocopier lease is $233 per month
and the current supplies used are $197. The
lease is a general expense for the company;
the supplies are an operating expense as
they vary from month to month. Supplies,
along with the lease cost, may be recovered
through copy charges to salespeople.
Alternately, the lease can be absorbed
either as part of office expense and built
into the overall commission split, or
covered through a desk fee. |
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| Example 2
of
General and
Operating Expenses |
| Owner’s car lease is $583 and gasoline
for the car is $139. Both are charged to
general expenses as these costs are part of
the overhead of the brokerage. |
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| Example 3
of
General and
Operating Expenses |
| Real estate board invoice is $955 ($300
for office membership; $100 each for 5
salespeople; and $155 for board supplies).
The $300 is a general expense, the dues of
$500 for salespeople is a variable expense
that may be ultimately recovered, and
supplies of $155 is also variable as it
relates to sales production. |
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| Net Income Analysis |
| Technically, the worksheet is designed
to analyze cash flow based on trade closed
dollars and actual expenses incurred. Many
times, managers may use the same worksheet
and budget future profits based on projected
sales volume and average expenses. As such
the worksheet becomes a type of budget
format. |
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|
Cash Flow Analysis |
| The budget provides an overall estimate
of financial performance that must be
converted into cash flow projections. This
task, broadly described as cash flow
analysis, is normally completed based on
historical operating data from the
brokerage. In such instances, the exercise
becomes largely one of refining prior year
budget estimates in light of actual and
forecasted performance levels. In the case
of income projections, if year-to-year
comparisons are unavailable (e.g., a new
brokerage), previous MLS statistics provide
a starting point, assuming that 80–90% of
all transactions occur on MLS.
Unfortunately, trend analysis for commercial
brokerages is more difficult as MLS
transactions may not constitute a large
portion of market information. |
| |
| Cash flow analysis begins with
estimating a gross commission income for the
upcoming year and then slotting this income
in relation to typical MLS activity. |
| |
| Expense calculations are also based on
historical data. Selected organizations and
larger brokerages provide guidelines for
predetermined expense categories. Expense
categories and selected budget amounts are
for illustration only. Wide variations exist
based on accounting systems used by
individual brokerages, compensation plans
for salespeople, and specific brokerage
circumstances, e.g., a new brokerage would
undoubtedly budget more dollars on premises,
advertising, and communication than a
well-established operation. |
| |
| Income Projections |
| Income projections are developed, where
possible, based on historical brokerage
information. MLS information may prove
useful when allocating budgeted sales volume
into workable monthly projections. |
| |
| The broker must categorize monthly cash
flow projections to align with financial
statements. A range of income categories
exist in the marketplace, particularly given
differing methods of compensating
salespeople. From that total, payouts to
other brokerages are deducted to arrive at
adjusted gross income. The analysis assumes
a traditional office in which salespeople
are paid a split of total commission and the
brokerage is responsible for most expenses.
The method by which salespeople are
compensated can dramatically affect the
budgeting process and organization of cash
flow projections. |
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| Expense Projections |
| Based on budget estimates, the broker is
now able to complete the expense portion of
the cash flow analysis. |
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|
Fixed, Semi-Variable, and
Variable Expenses |
| Expense budgeting has been refined
through the use of fixed, semi-variable, and
variable expenses. Traditionally, only fixed
and variable expenses were analyzed in the
budgeting process. Fixed costs remain
relatively constant despite increases and
decreases in production. Variable expenses
change with the amount of business
transacted. Recently, budgeting theory has
expanded to include semi-variable expenses.
These items, although relatively constant,
are subject to periodic increases as
production rises and are most frequently
encountered with equipment purchases.
Normally, equipment costs remain static for
a considerable period of time and then rise
to a new plateau owing to growth
requirements. |
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|
Revenue Units |
| Often referred to simply as ends (that
is, each transaction has two ends, one
listing and one selling; a transaction
involving one salesperson with both listing
and selling portion is referred to as
getting both ends or double ending), revenue
units are utilized by some brokerages to
accompany budget figures and gain a more
meaningful sales performance overview. They
can also be effective in evaluating overall
salesperson activity. Revenue units are
normally tallied as follows: |
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| EVENT |
REVENUE UNITS |
| Single
Listings Sold |
1 |
| Single Sale |
1 |
| Double End
Sale (Listing and Sale) |
2 |
|
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| Revenue units have proven very effective
in evaluating activity compared with
traditional methods that rely on sales
volume. Sales volume comparisons are
somewhat awkward as there is no universally
accepted method of calculation and rapidly
increasing prices can distort the true
position, e.g., increased volumes are not
due to market penetration but merely the
sale of expensive properties. Market share
can actually be shrinking while sales volume
is increasing. By tallying units, brokerages
can gather valuable year-on-year information
concerning amount of activity generated and
not just dollar volume. |
| |
| The revenue unit is preferred to
calculations based on total number of
transactions as this approach ignores the
importance of in-house (double end) sales. |
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|
Break Even |
| There are four steps in determining
break-even using revenue units. The broker
must first estimate an adjusted gross income
along with anticipated number of units to
generate that income. Break-even relies on
the traditional division of fixed and
variable expenses. |
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|
New Business Budgeting |
| The new brokerage (or branch office
within a brokerage), seeks to gain market
share while minimizing negative cash outlays
in growth stages. During the first year of
operation, most new offices are faced with
high fixed expenses, delayed cash flows, and
substantial start up expenses. Cash reserves
become a critical consideration as fixed and
variable expenses often exceed gross income.
The prudent broker should plan for income
delays due to (a) time lags between deals
written and deals closed that can often
exceed sixty days, and (b) time lags in
sales production from hiring to actual
production and receipt of commission income
from new salespeople. |
