How Principals Can Work Out Actual Revenue Targets

[ working through the numbers ]
by Craig Harrison Published

Plenty of times when I have asked real estate principals how they have been going, I get the answer, “Yeah good, we wrote $200,000 of commission last month.” Often though, when I ask what that means in terms of profit the principal isn’t quite sure.

We’ve talked a lot before about the importance of budgeting and setting targets. So how do you work out what your revenue target should be? Whether your current market conditions allow you to be shooting for your record profit year; or they mean you are battening down the hatches to keep your business going; the methodology to figure out your target is the same.

I’ve been doing a lot recently with business owners helping them to work out what their monthly commission income target needs to be to firstly break-even; and then extend out to shoot for their profit target.

SO, HOW DO YOU WORK THROUGH THE NUMBERS?

The first step is to figure out the amount of commission you need to write to cover all the fixed expenses you are committed to each month. This will not leave you any profit, but at least makes sure the doors stay open.

Start off by adding up your monthly commitments to:

  • Administration, marketing and property management wages
  • Premises costs
  • Equipment and technology costs
  • Director wages and costs
  • Company advertising
  • Other general overheads
  • Although they’re not in your profit and loss statement, allow for any loan repayments you need to make.

If you have a rent roll, the regular income will cover some of the above costs, but you’re likely to still need to write some level of sales commission to cover the rest.

Next, figure out what the average percentage of commission income your business keeps after paying franchise fees and sales staff commissions [ don’t forget about any quarterly or annual bonuses you have in place in your remuneration structure ]. If you on average keep 40%, then your break-even point is enough commission income that 40% of that amount is equal to your monthly commitments [ e.g. $250,000 of commission income if you need to cover $100,000 of monthly commitments ].

So now you’ve figured out how much you need to write in sales commission to keep the doors open. From that point, build up your target so that you’re shooting for enough to get to your annual profit target.

Where I’ve seen this utilized really well is when these numbers are then used to help pull together individual targets for the members of a sales team. For some businesses, it’s helped to highlight agents that aren’t quite performing at the required level for the overall business to be profitable; and then allowed the principal to help bring those agents up in performance.

Like any form of budgeting, setting your commission income target shouldn’t be a once a year exercise. Every time you add a cost to your business, you need to increase your target commission income using the formula you have in place. Alternatively, this exercise can quickly highlight unnecessary expenses you have in the business, and show how much more profitable your business can be with those expenses removed.

It’s worth reviewing your break-even point, profit formula and target commission income at least every three months to make sure that you’re shooting for the right target.

Craig Harrison
read more by Craig Harrison

During his 15 years in the Chartered Accounting profession Craig has provided a broad range of business consulting, taxation and accounting services.

Craig works with private businesses that operate in a variety of industries including real estate, manufacturing, retail, hospitality, professional services and primary production.

Craig also has a keen interest in assisting business owners to maximise and protect their wealth outside business structures.

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