There’s a lot of conversation in the real estate industry at the moment about changing sales volumes and what that could mean for agency owners. 

I’ve been having these exact conversations with clients recently, particularly around one question – what happens to your profit if your sales revenue drops? 

You might assume that if sales revenue drops by 30%, profit will drop by roughly the same amount. 

But that’s usually not how it works. 

The impact on your bottom line can be much bigger, which is why it’s so important to understand what costs in your business are fixed, what costs are variable and what you can actually change if the market changes. 

Watch below as I walk you through what a drop in sales revenue could mean for your business, or if reading is more your thing, keep scrolling! 

 

 

a 30% drop in sales doesn’t mean a 30% drop in profit 

 

Let’s look at a fairly simple example. 

Say your agency generates: 

  • $3 million in sales revenue 
  • $1 million in property management revenue 
  • $4 million in total revenue 

The cost of your sales team from commissions and other variable costs might be around $1.5 million. You might then have $200,000 in fixed sales wages and $500,000 in property management wages. 

That leaves you with $1.8 million in gross profit. 

Then you’ve got another $1.2 million in overheads – things like your support team, premises, subscriptions and other operating expenses. 

That leaves you with $600,000 in profit, or a 15% profit margin. 

Not a bad business. 

But what happens if sales revenue drops by 30%? 

 

 

understanding what is fixed + what is variable 

 

This is where knowing your numbers becomes really important. 

If sales revenue drops by 30%, your commissions and other variable sales costs should come down with it. 

But plenty of your other costs probably won’t. 

Your property management revenue may remain relatively stable. Your fixed sales wages probably won’t change immediately. Neither will your property management wages or many of your overheads. 

So, in our example, a 30% drop in sales revenue takes it from $3 million to $2.1 million. 

With property management revenue remaining at $1 million, total revenue is now $3.1 million. 

Your variable sales costs drop from $1.5 million to $1.05 million, while your other fixed wages remain the same. 

That leaves you with $1.35 million in gross profit. 

And if your $1.2 million in overheads also remain the same? 

Your profit drops from $600,000 to just $150,000. 

That’s a 30% drop in sales revenue resulting in a 75% drop in profit. 

Your profit margin has gone from 15% to around 5%. 

That’s a very significant impact. 

 

know what levers you can pull 

 

The point isn’t to panic every time sales volumes move. 

It’s to understand what a change in the market actually means for your business. 

If sales revenue continues to fall, how quickly could your business move into a loss-making position? 

Which costs will naturally come down with revenue? Which costs are fixed? And, importantly, what levers could you pull if you needed to protect profitability? 

The earlier you understand those numbers, the more options you have to make changes before a drop in revenue becomes a much bigger problem. 

 

we’re here to help! 

Every real estate business is different, and the impact of changing market conditions will depend on your revenue mix, team structure and overheads. 

If you’d like a hand understanding what the numbers are really telling you, reach out to the real estate accounting team or give us a buzz on 1300BDEPOT.

 

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