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REALTOR® Emeritus | | Creating and Monitoring Business Systems Financial Management | |
| Financial Management Is Your Company Profitable? Tax Record Keeping Escrow and Trust Record Keeping Personnel Management Compensation Policies Policies for Real Estate Operations More Resources | Systems are the infrastructure of a business. Setting up systems to manage your company's finances, personnel, payroll, and real estate practices will not only make brokerage operations easier but also possibly improve your profits. Lagging sales and high operating expenses cause more than 80 percent of all service and retail business failures, according to a survey by the Rocky Mountain Institute. An integrated financial management system can often reveal excessive expenses or slipping sales in time to take corrective action. How Well Do You Know Your Company? Business owners need to make decisions based on facts, not guesswork. Can you answer these and other basic questions about your company's fiscal operations? 10 Questions About Income 1. Is your income over or under budget so far this year? 2. How many transactions do you handle in a given time period? 3. How many sales have you closed so far this year? 4. How many pending transactions do you have? 5. What percentage of your listings do you sell? 6. What percentage of your listings sells before they expire? 7. What percentage of your company’s sales proceeds to closing? 8. What percentage of your transactions is split with other brokers? 9. What is the average price of homes you have sold? 10. What is your average return per sale? 5 Questions About Expenses 1. What is your desk cost/overhead charges per sales associate? 2. Do your yearly desk costs cover all your brokerage expenses? 3. How many of your associates exceed their desk cost? 4. What is your average commission rate? 5. What is your return on equity investment? Portions adapted from Financial Records for Small Business, Bank of America, 1984 3 Reasons to Keep Good Records 1. The IRS requires businesses to keep records to determine tax liability and to substantiate deductions and credits. In addition to standard business expenses, you must keep records for travel, meals, and gifts if you want to deduct a portion of them. If you want to claim tax deductions for travel and entertainment expenses, you have to provide source documents such as airline tickets and restaurant receipts—cancelled checks aren’t enough. 2. Banks require financial records to support loan requests. 3. If you decide to sell your business, you will need solid financial information to determine a selling price. Also, buyers will want to see your books and records. —Jim Gibbs, CPA, Pasadena, Calif. TIP: The IRS requires all businesses to keep financial records that support information submitted on tax returns for at least three years after the return is filed. Employment tax records usually are kept for at least four years after taxes are due or paid, whichever is later. Ask your attorney or accountant about specific record retention requirements. Useful Business Formulas Just like real estate, accounting and finance has its own vocabulary Assets = Liabilities + Net Worth Breakeven Point = Total Fixed Costs/Unit Contribution Over Variable Costs Debt / Equity Ratio = Total Liabilities / Owner's Equity Debt Ratio = Total Liabilities / Total Assets Desk Cost = Expenses / Number of Associates EBIT (earnings before interest and taxes) = Gross Revenue – Operating Expenses Gross Margin per Sales Associate = Gross Revenue Generated by Sales Associate – Commissions Paid to Sales Associate and Other Variable Costs Net Income = Gross Revenue – Operating Expenses – Interest – Taxes Net Profit Margin = Net Income/ Gross Revenue Net Working Capital = Current Assets – Current Liabilities Return on Investment = Net Income/Owner's Equity Adapted from Real Estate Financial Management, 2nd Edition, by David B. Doeleman, CRB, and Ronald C. Rogers, Ph.D., REALTORS® National Marketing Institute, 1986 Next Page: Choosing the Right Accounting Method |