My client started our consultancy day by telling me how successful he was. He told me he banked £816,000 last year from a single office. He was the market leader in his area. He was the biggest advertiser in the local paper and he had the highest Google review rating – average score of 4.6.
All very impressive. I asked him how much profit his hugely successful business made last year and he didn’t know. I asked him for last year’s accounts; after ten minutes searching, it turned out that this hugely capable estate agent, the market leader in his town, made a profit of just £48,000 before he drew a salary. This represents a profit margin of just 5.88 per cent! More importantly, it is significantly less than he could have earned as a salaried manager for a corporate chain.
If you can’t make the business work on paper it won’t work in practice!”
Early on in my consultancy days, I would have been surprised. After 25 years, I can testify that this is all too common. So why do so many outwardly successful businesses make such a meagre profit? The answer lies in the minds of the owners.
When I ask business owners why they started their own business, very few say that their primary objective was to make loads of money.
- I wanted to be my own boss.
- I was sick of being told what to do.
- I was sick of being managed by an idiot.
- I wanted a better work/life balance.
- I wanted to serve my clients better.
- I was made redundant.
All laudable reasons but they should not prevent you making a decent profit. How much should you be making? What can you do if you are not?
A well-managed letting business should make a profit (after a commercial salary to the proprietor) of at least 20 per cent of turnover. The best make 30–40 per cent but most of those have seven-figure turnovers and benefit from the economies of scale.
A well-managed sales business should make at least 30 per cent of turnover, the best run make 40–50 per cent. Sales businesses need to be more profitable as they are more volatile than lettings and need reserves for the next downturn.
If your business is making a lower profit margin than this, what can you do? The first thing is to prepare a mathematical model of your business. Apply realistic conversion ratios of valuations to instructions, instructions to sales, sales agreed to exchanges and then put in your average fee percentage and selling price. You may find that it’s impossible to achieve enough valuations to make an adequate profit. If so, you will need to address your fee levels or improve conversion ratios. If you can’t make the business work on paper, I promise that it will not work in practice.
Next, undertake a line by line review of your costs. Start with marketing costs; as the adage goes: half of what you spend on marketing is wasted but you do not know which half it is. Review where every valuation comes from and compare the return on spend of different marketing methods. This will show where you need to spend more on things that are proven to work.
Next, staff costs. Every sales person should generate at least three or four times the cost of employing them. If not, you may be overstaffed, you may be employing the wrong people or your salary and commissions may be over-generous.
Finally, service levels. Are you offering a higher level of service than you can afford? One client took dramatic action on this 18 months ago. His lettings division has always been very profitable but sales had lost money every year since 2008. His problem was that his average fee was only £800 and try as he might, he could not increase it. His solution was dramatic. He sacked his sales team and reduced service levels to those of an internet agency. It worked; last year, the sales division made its first profit for six years.
Once you have thoroughly reviewed income and expenditure, you need to monitor your results at least once a month. It is essential to check all your KPIs against your pyramid so that corrective action can be taken at the very earliest stage. It is also essential to prepare monthly management accounts so that you can keep on top of the financial side of the business.
Profit allows you to set aside reserves to see you through the next downturn. A profitable business is a legitimate reward for the risks that you take as a business owner and when the time comes to retire, every pound of profit that you make will increase the value of your business by £3, £4, £5 or more.
Profit is not a dirty word, it is your right, your security and it should be your mission.