Elite AgentOpinion

Planning Ahead: Revenue vs. Profit

WHAT SHOULD REAL ESTATE businesses be doing today to make themselves sustainable for the future? Paul Davies gives his opinion.

THE MARKET HAS been very strong in most major centres across the country and, as ever with an extended robust period, there will come a time when the market slows down. There is a real possibility ahead for reduced activity, reduced prices, reduced stock and perhaps also pressure on fees, or, in the worst possible scenario, pressure on all four.

There’s a tremendous unpredictability with business and business owners need to be prepared for that unpredictability. A sustainable business, to me, is one that has a healthy profit margin so that it can weather variations in income.

Some agencies have got into bad habits during the boom years by paying attention to the wrong part of the balance sheet. When things are going well and the market is at its peak, it’s easy to get over- excited by strong sales figures and then lose sight of the simple fact business success is measured by profits, not revenues.

You need to plan ahead to remain sustainable throughout the tougher years; whether it’s a global upset or a market turnaround, we know that the market will change.

Agencies need to put their operating costs under a microscope because, for the bulk of agencies across Australia, their businesses aren’t set up to be run economically. They’re set up to maximise income. Of course, that’s relevant and very important, but what’s left after you’ve paid your operating costs is the only measure of success.

I think one reason this problem occurs is that many people who become principals are well versed in listing and selling but lack business management experience. The lesson for principals is to do more than just focus on where the next deal is coming from; you also need to calculate what it costs to create those deals. If you discover your margins are too small, you should consider cutting costs. That could include reducing your staffing levels, sub-leasing part of your premises or even doing away with your expensive shop front.

Did you know an average shop front business across Australia retains between 15 and 19 cents in the dollar after all expenses are paid? Did you also know this is considered within our industry to be normal?

I think it’s abnormal,and outrageous to spend between 81 and 85 cents to keep only 15 to 19 cents in every dollar. It is also very risky. If you were to have either a drop in income or an increase in costs, or both, unfortunately, the 15 to 19 cent profit margin would very quickly disappear. That’s why you see so many businesses close down.

My mission is to create businesses that have the opposite position; that is, 15 to 19 cents in the dollar to cover the entire business’ operating costs, leaving you with 81 to 85 cents in the dollar clear profit. I’m not making this up! It’s completely true. Business can be conducted so much more economically than before. There’s no need for a huge office any more.

Let’s not forget the real estate agency business is a fabulous one. Our shelves are stocked with millions of dollars’ worth of stock that other people own. Then you can have those people who own the stock, the vendors, pay you to promote their property so you can earn a fee.

But there’s more. You can do this without an office, from the comfort of your home, or anywhere; a shop front isn’t essential any more. So you can run a very efficient and effective real estate business without all the substantial overheads that we’ve been brought up to think that we need.

My advice to business owners today is don’t rest on your laurels, thinking that business will always be this way. You need to stay one step ahead of the market.

A business owner who’s come into the business during a boom market is really only concerned with revenue. When they start to run out of money, they may fall into the trap of only looking to create more revenue. Those sorts of businesses need to review their attitudes quickly, or they will go under.

I urge all those who own real estate businesses to watch their operating costs very closely. This will help you to weather any drop in revenues and bolster your survivability in the future.

At the end of the day, those businesses with the biggest reliable profit margin will be best positioned for the future.

So get ready now; expect the best, but prepare for the worst.

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