Financial reporting is one of those tasks most of us loathe, but we know it's critical to sustaining a business.
Running your brokerage without the right financial tools is like walking in the dark. You can’t see where you’re heading and can’t foresee the obstacles that may crop up along the way.
Although it’s tempting to leave the hard sums to your accountant, your brokerage will be in better shape if you fully understand the numbers. Delving in deep and building the right reports from scratch will also help you identify where you’re overspending, under-investing and leaking profit margin. But with so many reports, how do you know which are the must-haves?
Here are the four financial reports I believe are critical to running a successful brokerage:
1. Cash flow forecast
You’ve probably read again and again that a lack of working capital (cash flow) is the primary reason that small businesses fail. That’s because it’s true. Bad cash flow can bring down even the most active businesses. In the case of real estate, the endless wait for commission is a threat that looms large if not predicted and managed properly.
A cash flow forecast is like keeping an eye on your bank account. Quite simply, it’s your best armour in the prevention of cash flow problems. Through cash flow forecasting, you’ll be in a position to identify droughts and take action before your last cash reserves dry up. A decent cash flow forecast will ideally project forward one quarter, giving you plenty of time to put in place measures.
The best way to forecast your future income and expenditure is to analyse your past property sales, supplier invoices, staff salaries, commission payments, marketing expenditure and rent over the past six months. Don’t forget, real estate is seasonal, so you need to take a big enough sample to take into account the peaks and troughs.
Also consider when you actually make certain payments. For example, your utility bill might be quarterly, but your salaries monthly. Get down as far as the specific day of the month you expect to make payments. How long do you generally wait for commission and other income? Worry about the big expenses and revenue items, then cover off things like petty cash. Finally, don’t overlook things like insurance, tax or compliance costs.
2. Profit and loss statement
Where the cash flow forecast deals with ‘cash’, a profit and loss account summarises the ‘transactions’ relating to that period. This is known as accrual accounting and will make adjustments for sales that have not yet resulted in any commission payment. Your profit and loss statement will therefore provide a more realistic picture of how your brokerage is performing. You might still be chasing commission, but you have made the sale, at least.
Let’s say your brokerage has had a cracking month and surpassed all previous sales records. Now imagine the very real scenario that your brokerage has not yet received any commission. Your cash flow forecast will show a very bleak month, because no cash has been received (other than cash you’ve received from previous sales, of course). However, your profit and loss will paint a very different picture!
A profit and loss is also a great way to keep track of your margins and your costs to ensure they aren’t diminishing your profits.
3. Aged debtors report
An aged debtors report will help you keep track of debtors who don’t pay on time, so you can take action in the form of regular reminders and investigation of invoice disputes.
In real estate, we can view aged debtors as commission. It’s good practice to keep a ‘commission payment report’ to help you keep on top of problematic commission payments and spot potential problems. This report can also help you forecast how long you typically wait for commission, which will feed back into your cash flow forecast.
4. Balance sheet
The balance sheet summarises your assets (what you own), liabilities (what you owe) and your net assets (how much you have invested at any one time). This report is crucial in providing a bird's-eye view of your brokerage’s performance.
All four reports will help you navigate through fear and uncertainty – and have you firing on all cylinders. You can't do without them.
James Steer, chief executive, Commission Flow
James Steer is a real estate finance expert with nearly 25 years' experience running businesses involved in the sale, management and development of residential property. As CEO of Commission Flow, James applies his deep understanding of real estate operations to helping real estate agents manage their cash flow and create the financial freedom to grow.