The Three Key Areas of Your Budget Model

When people sit down to discuss refinancing a mortgage or maybe costing out the potential return on renovating their kitchen—despite all the math and calculations—don’t they tend to get energized? Of course they do. They get energized because they understand that implicit in these calculations is the opportunity to save thousands on their mortgage or markedly increase the value of their home through renovations. It can be the same with your budget. When you view the money you spend (expenses) as simply the cost of doing business, budgeting remains a chore. However, when you see every dollar spent as an “investment in your future,” you’ll approach budgeting with more excitement and a high level of interest. Budgets can be interesting, and it is time to change your perspective.

Your philosophy should be that for every dollar invested in a business expense, you should receive some multiple of that dollar back. Dollar for dollar isn’t enough. Why? If you were to invest a dollar and get only a dollar back, why would you go to the trouble of spending it in the first place? Just keep the dollar and save the time. However, if you can get multiple dollars in return for a dollar investment, then you know you are not spinning your wheels. Every dollar in your business can be accounted for in this way. And when you view budgeting in this manner, where expenses are investments, you’ll get excited and see your budget for the powerful financial-planning tool it is.

THE THREE KEY AREASOF YOUR BUDGET MODEL

When it comes to your Budget Model, you’ll want to concentrate on three areas in particular. First, you’ll want to adopt “Lead with Revenue” as your financial motto. Next, you’ll need to get into the habit of playing the mental “Weanalyze our P&L monthly and we have gotten better at controlling our expenses.” David and Judie Crockett Millionaire Real Estate Agents Concord, OH Sales volume—$53 million

game of Red Light, Green Light with your expenses. This is about getting incremental results from incremental increases in expenses through accountability. And lastly, you’ll have to develop the self-discipline actually to stick to the Budget Model you’ve adopted. Let’s quickly take a look at these important budgetary issues.

1. Lead with Revenue

The key to budgeting and spending is to subscribe to one critical discipline: Lead with Revenue (not expenses)! The basic idea is to try to spend only money that your business has generated. Or, to put it simply, make money before you spend it. The beauty of the real estate sales business is that the actual cost associated with getting a single buyer or seller listing is really quite low. With a proportionally small investment, you can generate revenue in your real estate sales business that will, in turn, fund the growth of your business. The key is to start with this approach as early as possible and keep it as a discipline throughout your career.

Often, the difference between a successful start-up business and an unsuccessful one is usually decided before the business ever opens its doors. Companies that successfully minimize their start-up cost and debt before they open for business and start generating revenue quickly have a much better chance of survival. As we saw in the dot.com boom-andbust era, some companies perceived as having smaller “upsides” ended up outliving many of the high-profile companies by following better business practices. A good example is a now-defunct software company in myhometown, which was a poster child for what we call “leading with expenses.” Here was a company that spent millions on Super Bowl ads before they had positive cash flow in their business! Unfortunately, many real estate agents take this same Field of Dreams (“if I spend it, they will come”) approach. They think that if they spend a lot of money up front or build the infrastructure of a big sales organization up front, the business will come. If you hold to the Lead with Revenue approach, it will

force you to lead with lead generation and sales—not expenses. As the dot.com bust helped remind us all, when you continually lead with expenses instead of forcing the business to generate its own income, what often comes is a total loss.

2. Play Red Light, Green Light

You should never be as concerned with how much money you’re actually spending as you are with the results you get by spending it. At some point in your career, it will take the careful spending of money to make money, so over time be prepared to invest money back into your business to build it. It is not the spending of money that is the problem. The problem is holding the money you’re spending accountable for results. And the solution is the same old game Red Light, Green Light. So, if you begin the process by Leading with “I do all my own budgets, I track my P&Ls and I have a great accountant who understands business.” Don Zeleznak Millionaire Real Estate Agent Scottsdale, AZ Sales Volume—$77 million

Revenue, and you are always investing money your sales business has already generated, then your job is to hold that investment accountable. Now at some point the dreaded “cost creep” will probably occur. However, you can greatly minimize your risks by following sound business practices like Leading with Revenue and Red Light, Green Light. When your costs just creep up with no corresponding increase in results, that is when you really have risk. We call that “good money chasing bad business practices.” You correct it by pulling out your stop sign and reevaluating that expense. In terms of insulating your company against unexpected income shifts, you want to concentrate on keeping your fixed costs (like rent, salaries, leases, etc.) as low as possible. If you have higher fixed costs and face a shortfall in revenue, you might be tempted to cut back on variable or unfixed expenses (like lead generation), which

drive your business. This can create a wicked catch-22 situation in which, because of falling revenue, you cut back on investing in the very activities that are likely to increase your revenue. Keep your fixed expenses as low as is practical and hold your discretionary expenses accountable to appropriate results.

3. Stick to the Budget

Obviously, as your business grows from one stage to the next, your actual costs will be very different; however, your percentages may not be. What we have discovered is that no matter where you are on the continuum, the percentages remain remarkably stable. Figures 18 and 19 illustrate some general

“Over my twenty plus years I’ve learned that you must budget and control your expenses. That is how I can take 75 percent to the bottom line.” John Toye Millionaire Real Estate Agent Westland, MI Sales Volume—$39.2 million

examples of what budgets at various production levels might look like. Budgets are to be respected. They are there for a reason—to guide you as you invest in your business. Doing the research to determine how the money in your business should be spent and then not following it can be summed up in two words: Sheer folly.

NATURAL RHYTHM

Lastly, I want to point out to you that there is a natural monthly rhythm to business, which demands that you examine your books at least once each month. I’ll go so far as to recommend you keep a monthly budget but address it on a weekly basis. Why? Because Leading with Revenue and Red

GCI (6M) (10M) (16.7M) (26.7M) (40M) $180,000 $300,000 $500,000 $800,000 $1,200,000

Cost of Sales* 21,000 21,000 100,000 250,000 350,000 Gross Profit 159,000 279,000 400,000 550,000 850,000 88% 93% 80% 69% 71% Expenses 59,300 93,000 152,500 238,000 344,000 33% 31% 31% 30% 29% Net Income 99,700 186,000 247,500 312,000 506,000 55% 62% 50% 39% 42%

* Assumes Cost of Sales includes company desk fees or splits, commissions or salaries paid to buyer or seller agents helping you in the business, royalties and referral fees. ** All percentages have been rounded up to the nearest percent.

Figure 18

1. Salaries

2. Lead Generation

3. Occupancy

4. Technology

5. Phone

6. Supplies

7. Education/Dues

8. Equipment

9. Auto/Insurance EXPENSE DETAIL

20,000 36,000 65,000 100,000 144,000 11.1% 12% 13% 12.5% 12% 18,000 30,000 50,000 80,000 120,000 10% 10% 10% 10% 10% 1,500 2,500 3,000 4,000 5,000 0.8% 0.8% 0.6% 0.5% 0.4% 4,000 4,500 7,500 12,000 18,000 2.2% 1.5% 1.5% 1.5% 1.5% 2,600 3,000 5,000 10,000 12,000 1.4% 1% 1% 1.3% 1% 1,800 3,000 5,000 8,000 12,000 1% 1% 1% 1% 1% 1,800 2,000 5,000 7,000 12,000 1% 0.7% 1% 0.9% 1% 3,600 6,000 6,000 8,000 12,000 2% 2% 1.2% 1% 1% 6,000 6,000 6,000 9,000 9,000 3.3% 2% 1% 1.1% 0.8%

All percentages figured as a % of Gross Income. These are a rough approximation and have been rounded up to the nearest tenth of a percent.

Figure 19