Build a Smart
Budget . . . or Three
1. The Operating Budget
Purpose: to forecast and track revenues and expenses.
Operating budget is what most people think of when they hear the word budget: a fore- cast of sales, or revenue, and an estimate
of expenses based on that forecast. Breaking the
components of your operating budget down by rele-
1Estimate the number of transactions you expect to close each month.
Because the amount you’ll earn from sales depends on
home prices, revenue can vary greatly. It’s easier to forecast if you break closings into manageable segments.
In the chart, the estimated closings for each month are
broken down into four quartiles: (I) under $150,000,
(II) $151,000 to $225,000, (III) $226,000 to $300,000,
and (IV) greater than $300,000. Add all those numbers
to get a yearly total forecast.
2 Use your forecast to estimate monthly transaction revenue.
Determine the average revenue per closing for each
quartile, and multiply that by the number of closings
you expect in each month.
3 Calculate fee revenue separately. For a broker, fee revenue usually includes
agents’ desk fees and referral fees. Desk fees are
fairly predictable, but referral fees can be erratic, so
look back at historical receipts in order to forecast.
vant detail—rather than forecasting one revenue and
one expense figure for the entire year—will pay o;.
So resist the urge to go with lump-sum projections.
Here are 5 steps for creating your operating budget.
The chart at right corresponds with the steps.
4Calculate your cost of sales and subtract it from total revenue to
determine your gross profit.
With a rough revenue budget in place, you can calculate
cost of sales (COS)—that is, the expenses directly
tied to making those sales. Commissions and outgoing referral fees fall into this category. Since outgoing
fees are typically the first paid after a closing, they
should be the first addressed. Franchise fees are pretty
straightfor ward. A common example is 5 percent of gross
closing revenue after referral fees. But as with referral fee
revenue, referral fee expenses can be hard to forecast.
Again, use historical data as a starting point.
Once you’ve addressed fees, estimate agent
commissions. There are many types of commission
arrangements; a common example (used for purposes
of the chart) is 65 percent of gross closing revenue after
fees. And if there are other expenses within your brokerage that fall into this category, estimate them in the same
manner as commissions and fees and total them. The total cost of sales is then subtracted from total revenue to
determine gross profit.