Top 4 Things to Consider When Budgeting for the Brokerage
Daniel Levison | November 7, 2019
No matter how successful your brokerage becomes, and how much income you generate, budgets will always be something that are integral to the well-being of your brokerage.
Companies should always be mindful of the budget on a macro level, but right now is the time of year managing partners want to give serious thought to the upcoming year’s budget. We have some advice from a former commercial real estate brokerage managing partner of things to prioritize when creating a financial plan.
Considerations for the Managing Partner
While there is no “One Way” for every brokerage to set up a budget, there are a few commonalities all managing partners should be mindful of as they budget.
Budgeting is not an activity that can be done over the course of an afternoon or weekend. Best practice is to break down your budgeting process into areas of your business; i.e. revenue, payroll, business development and technology are examples of breaking down your budgeting process over a 2-4 week time frame. A good commercial real estate brokerage always has ears to the ground and stays abreast of trends. This can mean anything from knowing who in your brokerage has consistently strong performances during certain times of the year to the leaner months when CRE slows down in your area.
In the same way creating the budget is not an afternoon task to check off, knowing these trends isn’t as simple as reading an article; brokerages need historical data in order to successfully forecast their firm’s budgeting needs.
Creating annual expense budgets and agent revenue projections give executives and management the ability to gauge and track the pulse of your CRE business throughout the year. A software platform with built-in pipeline capabilities will significantly streamline this process for any CRE executive.
Revenue Per Agent
Traditionally, it’s a nightmare to figure out where the money is coming from, and what agents, and what the agents are focusing on. There’s this process where you feel like you’re beating them on the head for months for their data, but it’s the most critical part of the budgeting process.
While it may add a cost to your overall budget, adding a process for tracking pipeline revenue is also helpful for commission-based organizations as management historically struggles to develop accurate budgets when their primary revenue source is created through commissions as opposed to selling widgets.
Brokerage revenue is just one piece of the bigger company puzzle — although, admittedly, the most complicated to track, due to the agents graduated split plans. And with agents’ overarching mantra and philosophy of “just get the deal done” of course caused even more headaches for any back office.
Sectors’ Revenue Production
The revenue generated by CRE brokers becomes more complicated when management starts breaking down the percentage of revenue coming from each sector — office, industrial, retail, land, and investments.
Within each of those, percentages of revenue coming from each sector should be considered in the budget. Having a clear picture of what sectors generate the most revenue allows brokerages to see where they should utilize resources.
You never want to hire agents for the sake of making your brokerage look bigger. To balance the line between firm growth and prudent financial management, it makes the most sense to figure out what sectors in your brokerage can support more agents.
Should you be hiring land guys? Investment brokers? Focusing on apartments?
As we already discussed, good managing partners know industry trends and keep their ears to the ground; if your firm is already leaving money on the table in certain sectors, will hiring more agents fix the problem or should the agents you have try to be more efficient in these under-performing fields?
A commercial real-estate specific application can help you easily manage sector revenue percentages, and how to apply that information to your brokerage budget.
One of the best ways to gauge the health of your brokerage is frequent monitoring of the firm’s desk costs. “Desk cost” is an umbrella term to refer to the cost that it takes to keep a broker at the firm. Factors included in desk costs can be anything from business costs like advertising or continuing education and licensing costs. In order to really get the most out of budget planning, your brokerage should have an efficient way to keep track of “Effective Desk Occupancy (EDO).” EDO can be as granular or as broad as a managing broker desires for their specific brokerage company. As brokerage companies grow and we typically see their level of sophistication grow accordingly. In the broad terms effective desk cost is the total expenses of running your business, think in terms of building operating expenses divided by the number of total agents.
An easy way to calculate this is simply dividing the total costs of your brokerage by the number of agents; however, that only allows you to see an average, which, in the long run, hurts your budget planning. A technology platform that will do all the heavy lifting and automate calculations and individual desk cost can be a huge time saver for the brokerage’s operational team.
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Budgeting is so much more than simply making sure your brokerage doesn’t exceed its income. As you plan and review 2020 CRE brokerage budget over the next several weeks, don’t forget to factor in agent revenue, sector revenue percentages, and desk costs to create the most effective and thorough plan for your firm.
CommissionTrac is here to assist you with all your back office and budget-planning needs, and all the analysis factors associated therewith. To find out how you can use CommissionTrac to gain clarity and insight on your brokerage’s performance, manage your company’s individual receivables, commission plans, invoicing and distributions, and experience why Techstars Atlanta and Cox Enterprises are lead investors in CommissionTrac, request a demo today by visiting our website.