10 - The How and Why of Profit & Loss Statements
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Joe Rodriguez
Hello. My name is Joe Rodriguez and you're listening to Get The Money Right with Todd Butzer. Todd is decades of experience in giving real estate agents the training and resources they need to get their finances on track. And this episode, how will be informing you how to make a profit launching and why you need one. For many of us, this podcast, you can listen to it when you're driving or you're doing laundry. But for this episode, we highly recommend you take the time to open the resources we link in the description to make it easier to follow along.
And now here's Todd.
Todd Butzer
Thanks, Joe. Hi, everybody. Welcome to episode ten of Get the Money Right. We're so glad you're with us. And today we're diving into for some of us might sound like kind of a heavy topic it's really not going to be that. And it's we're going to look today at the PNL or the profit loss statement or sometimes called the income statement. They're interchangeable. People call them both of those things. So the first question I would well, let's just get right to it. The first question I would have for you is, can you go print? A current piano for your business. And by current, I mean last month and then year to date. So if you're listening to this in September, can you print August's PNL and January through August? Can you do both of those? If you can, then you know you can listen if you want. And if you don't, you can go check out something else that's cool to listen to on a podcast. That's a good sign if you can print it. If you can't print it right now. And we know many real estate agents can't just go do this because they don't have panels. If you don't have one, this will be a good exercise for you. We really believe that it's kind of important to the business.
So I have some questions around your business and I'm just going to ask rhetorically to you as you listen incidentally, as you listen through this, you're going to want to be able to take a look at a piano. You can do that a couple of different ways. We'll post one on our site, just a basic one. And also you can just go online and Google a profit loss statement for small business and you'll get a pretty good handle on how this how this works. So the first question is, how much money did your business make last year? And that could include if you pay yourself a salary and then you also have distributions. What would be the total number of that? But how much money did your business make last year? As you look at your expenses, what percent of your gross commission income are your expenses running currently? As you look at your gross commission income, what percent of that income is a cost of sale to you? What percent are your cost of sale? Right. What percent is your lead gen? And marketing costing at the moment based again on your gross commission income. If you have a staff, what are the salaries running? Do you operate from a budget? Are you properly funding areas to grow your business?
Those of you that joined us on the last the last episode with Maureen Stahl. If you haven't, I highly recommend you go back and listen to that. Maureen talked about as an agent. She really wasn't operating from a panel and therefore she didn't really know where she was properly funding the business, or maybe she was overspending in certain areas. She just wasn't sure. All right. And so as you listen to those questions, those are almost impossible to answer if we don't have a panel. And I would submit that many, many agents go through their days and weeks and months and they're just kind of putting the money in an account like we've talked about before. And they have they have no way to really look at and track. The viability and the performance of their business, which is what a PNL allows you to do. Incidentally, I think I brought this up on a recent podcast show, but I just heard a story about a gentleman, a high producing agent that was looking to be acquired and the people that were looking to acquire the high producing agents business asked for a panel. And he didn't have one. And it's going to be very difficult to sell your business or to take on an investor or to make good financial decisions if we don't have one of these.
So let's get right into them, how they work, what they are, and what they can do for you and your business. So basically. The formula here is revenue minus expenses equals profit. Now, there are some things we do within that, but that's essentially it. Now, as I say that, I would also say to you, you really don't need to go into some sophisticated software to do this if your business is very, very basic. It can be as simple as keeping it in a ledger. It's just a little tougher to do it that way. So really, on a personal recommendation, I would recommend something like QuickBooks or something, you know, on that end to track your business. The other beauty of doing this, I'm sidetracking a little bit here is that. By utilizing and using a PNL were able to properly account for. Appropriate business deductions. And if we're not accounting for those folks, it's costing us a lot of money and a lot of heartache, to be honest with you. All right. How do these things work? So I said to you earlier that the formula is basically revenue minus expenses equals profitability. So the PNL works in those sections. All right. Now, what you're going to first look at is the revenue side of it. It's usually the top of every PNL that I've ever seen. Starts with the revenue side of your business. A lot of people like to say the income side. So in your business there would be categories and what we refer to these as is charts of accounts.
Okay. And incidentally, you can go load. It does not matter where which company you're from or where you work. You can go to Kettler Inc, KTLA, r I in K Keller Income and there is a chart of accounts there based on Gary Keller, Jay Patterson and Dave Jinks, best selling book, Millionaire Real Estate Agent. And there is a beautiful chart of accounts right there that you can download for free and import into QuickBooks. And there's people that can help you do that. So I'd highly recommend that you go there because those are specific real estate related charts of accounts. So what does this look like on the income side? And you can break this down specifically to how your business works, of course. And that's what you want to do. You want as much detail in here as you possibly can, but on the income side, you would have things like listing income. This would be income from a sale of a property where you were the listing agent on sales income where you can break both of those apart. And again, this allows you then to get the data and say, which percent of my business, what percent of my business is coming from listings?
What percent is coming from sales? Am I more sales oriented or am I more listing and market share oriented? All right. We could have things in this in these categories like referral income. Referral fees would come in here, maybe leasing income. If you're doing commercial sales or commercial listing, leasing, that would be included in the income side of the PNL. All right. Now, basically, when you're done with that chart of accounts and the money is going is being entered into those different income categories. You're going to come up with a line item. That is essentially your total income or what we like to say in in the real estate vernacular anyway, your GCE, your gross commission income. And again, it could be referral fees, things like that that's flowing into the income side of your business, which tells you a lot actually. The second section now I said it's revenue minus expense equals profitability, and that's true. However, we do break apart the expenses to a degree. We first have what we call cost of sale. Many of you know what this is, but for some of you may be a new term and think of a cost of sale is simply this. This expense, if you will, does not occur unless there's a sale. For example, if you have rent, you're going to pay rent every single month. If you have coaching, you're going to pay coaching every single month. If you have Internet, you're going to pay Internet every single month.
Okay. Those are fixed operating expenses. That's not what's going here. What's going here is something like, for example, the commissions back to your office or what sometimes we refer to as company dollar. If you're on a split with your broker, those splits would be part of your cost of sale. They don't occur unless you have a sale. All right. Royalties. If you're part of a franchise system, you may have royalties that you pay up to certain dollar amounts or it may just continue forever, depending on your arrangement.
Royalties paid would be an example of a cost of sale. Again, you don't incur it unless you make a sale. If you have team members, you may have a listing specialist, or maybe you have a buyer specialist and you're paying them direct commissions out of the sale of a property. Those would be considered cost of sale. Now, an obvious question here would be, well, why don't why does that part matter? It matters because we want to know if we're profitable on the sale itself. Or is the cost of the sale so expensive to us that our margin, if you will, our gross margin, our gross profit has been eliminated or is so small. We're not going to be able to, you know, manage our operating expenses in addition to it. So it's a good number to track. I've had people say that their cost of sales went up and their profit remained the same because they were able to then make adjustments to their operating expenses to offset the increase in the cost of sale. So that's what the cost of sale is. It's the first well, the second major section in your panel. The first section is your income. And that's going to be categorized in the different areas that we talked about.
Then we're going to have charts of accounts for our cost of sales commissions to our office or company dollar royalty, listing specialists, buyer specialists, other commissions paid out referral fees and so on. Those are parts of our cost of sale. Now, when we're done with our total cost of sale and we'll total these all up on the piano, we will then come up with the category of gross profit. Some people call it their gross income. Some people call it their gross margin. I would just encourage you and you can Google look these up. But I would just encourage you to always call it the same so that as you bring on team members or you talk with your professional tax and legal advice, which you're going to need to do when you do that, you're using the same terms in each of the each of the times. Okay. The next section in this one is so critical because it's a beautiful part. Of owning a small business. And if you listened to Maureen last week, the mega agent and business office owner, you heard a lot about her trading of expenses and deductions and so on. Expenses are the IRS looks at these like this. They call them ordinary and accepted expenses for operating your business. These are ordinary and accepted. These are common. These are things people incur in order to operate your business. And again, going back to an earlier episode, I'm going to highly, highly, highly recommend. Number one, you have great, great tax advice. Number two, you have a great bookkeeper. And number three, you're putting all of your expenses on one credit card that can help you categorize. And then if you have a system like QuickBooks, it'll just import it and it will know which categories to put them in. After you assign them for the first time, it will just automatically assign them and you'll be able to track these. All right. So what goes in here? And we're not going to go through every expense list because Joe, at a later date will go really deeply into deductions and the power of deductions. But it all starts here, folks, and that's the record keeping of the deductions. So what are typical expenses for operating a business like ours? Well, if we have a staff, if you're building a team and you have a staff, you may have salaries affiliated with that, you may have benefit packages and so on. Okay. There could be payroll processing. Maybe you use a service for that and that they're charging you, whatever, $50 a month or $100 a month or something like that, that would all go under on the on the salaries area. Lead generation would be another typical expense for operating your business. And you can put as much detail folks into this as you want. Advertising, you know, Internet leads that you're buying. Entertainment. Be cautious on that in terms of deductions. We can talk about that later. Direct mail, if you're still doing that or print advertising or any billboards, networking, whatever you're doing to lead generate would go into your lead gen categories. And incidentally, each one is going to have its own chart of account. It will all be advertising, will be its own direct mail will be its own, and so on. Internet lead gen will be its own, things like that. Then you'll be able to told all your lead gen costs. And you'll remember earlier I said, what percent of your gross commission income are you investing in lead generation?
Here's what this can tell you, incidentally. What if what if someone comes to me and says, Well, Todd, I've got that number down to two, you know, zero or 1% or something. Okay. Well, maybe we're underfunding our legion. Maybe we're restricting our growth because the number is too low. So be cautious here. Low is not always good. It can be in certain areas, but it's not always good. Sometimes it's not nearly enough. And that's what this will this document, this statement will tell us. Okay. Other expenses, rent, utilities, repairs, computers, technology, telephone services. If you if you use something other than your cell, your cell phone, of course, Web creations, all your communication and technology, things like education would be in here coaching, consulting, books that you're buying, education, dos. Maybe you belong to an association. Fees for that association, things like that. Of course, another big area that we're going to want to track in our industry is our automobile expense. And again, we'll get into the details of how to do this.
But your normal operating expenses after cost of sale. Are typically most of these are going to be fixed expense. Your automobile will go up and down as you use it. But a lot of this is going to be a fixed expense. Your rent will be fixed, your coaching will be fixed and so on. Okay. Office supplies would be would be a category. Insurances for your business, Arizona missions, maybe some property liability, things like that. And we'll talk with an insurance expert at a later date.
But insurances would absolutely be an additional expense that you'd list on your PNL, professional services, your accounting fees, tax preparation and so on and so. And those are just that's just a basic list of what's going to go on under your expenses. I've brought this up in an earlier episode, and it's fairly common where an agent will hold. They'll show up at a class and they'll write a personal check for that class. Well, unless they go back and find that later or recapture it later, they're going to miss that deduction and we're going to get into deductions at a later date, but they're going to miss that. So this is where we're tracking all of it. And what you might find as you watch your panels. And we're going to use these then to build a budget at a later date. You're going to find areas in here where you might have expense creep, like we talked about with Ashley Skillman, our certified financial planner. You might you might start noticing that here. You might see percentages, items as a percent of your GCI start to creep up.
Maybe your salaries are moving from 12, 13% to 15 or 18%, and maybe you're giving raises and you're doing this is where all of those. Business decisions come from is this document. Now, once we've listed out all of our expenses, we will have a total of those. And you're going to have essentially your net operating income. And then normally there's another category called other expenses. And these could be things like some sort of a tax bill or recognition of a sale of an item, not a real estate sale, but maybe you sold part of your business or something like that. Things that that, you know, that are unusual. They don't normally happen to you. Those would go under that line when you're all said and done, know you're going to have what's called your business profit. And you're now able to account for where did the income come from? How much did it cost me to make those sales and was I profitable in those sales? What were my normal and average or steady, if you will, operating expenses throughout the month? And then what was left over for me? And that's a piano, and that's essentially what these documents are. Now, how do you use them? Well, number one, the data has to go in regularly. And again, if you're using a software system, it'll go in automatically. It'll draw from your credit card account and bank accounts and so on. It'll update throughout the month. Then each month, what we're going to do is, you know, you pick a time, 10th of the month or so, you're going to print out your pencil. And we'll go over this at a later date of how you actually compare these two budgets and so on. But you're going to print out your panel for the month and you're going to print it out for the year to date. All right. And here's what we'll learn. We'll learn those questions that I asked in the beginning. We'll know the answers to those off the top of our head. So, for example, let's say that you had a gross income goal of pick a number, $200,000 for the year. Again, that's not your family's income. We know that from earlier episodes. That's your revenue goal. This document is how we're going to be tracking that. So if I were to say to you, Joe, where are you year to date on your revenue? Your goal was 200,000. We're now halfway through the year. Where are you at? And Joe says, Well, I'm out 160,000 and we're halfway through. Great. Maybe we want to up that goal. Well, I'm not at 116. I'm at 60. Okay. Do we do we change the goal or do we change our actions to be able to hit that number?
Because we didn't make up that number in the beginning. We thought seriously about that number. Folks, this is your tool. To answer that. This is your tool to monitor the progress of your company and also submit to you that the most successful companies from. Mm hmm. You know, art dealerships to restaurants, to manufacturing, to retail, you name it. If it's a well-run company, somebody in there is good with these numbers. Somebody is tracking and watching the numbers with. You know, a vengeance. I mean, they're looking at them very, very carefully. All right. So that's a PNL, folks. Revenue minus expenses equals profit expenses. We'd normally break into two main categories cost of sale, which occurs only at the sale and ordinary operating expenses to operate our business. And I hope this helps you as you start thinking about those questions. I asked what percentage of your net operating income, what percent is your cost of sale, what percent are your salaries and so on? You'll now be able to answer those questions. So I'm going to direct you to our website and look for a sample panel there or just Google them. They're all over the Internet. I'm also going to recommend you revisit the millionaire real estate agent, and I want you to revisit that book because in the book there are us there's a sample panel and there's also specific percentages assigned to those charts of accounts that are good target percentages to be looking at as you start to manage this part of your business and you start to really get the money right.
Joe Rodriguez
That concludes this episode of Get The Money Right. To stay up to date on the latest in Get The Money Right, follow us on social media and be sure to subscribe on your podcast platform of choice. If you want to support the show, please leave a five-star review and if you think what we’re sharing is valuable, we encourage you to share with your colleagues. If you are a real estate agent who is getting their money right and want to be a guest on the show, please submit all inquiries to getthemoneyright.podcast@gmail.com. Thank you for listening, and have a wonderful day.
In this episode, Todd will be informing you how to make a Profit and Loss sheet and why you need one.
MREA Chart of Accounts
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