11 - How to Make Budgets Work for You
Listen to full episode :
-
Joe Rodriguez
Hello. My name is Joe Rodriguez and you're listening to Get the Money Right by Todd Butzer. Todd has decades of experience in giving real estate agents the training and resources they need to get their finances on track. In this episode, we'll be talking about budgets and how to think about and execute them to make it work for your business. And now here's Tom.
Todd Butzer
Thanks, Joe. Hi, everybody. Welcome to episode 11 of Get the Money Right and last episode, if you haven't listened to it yet, we looked fairly closely at a profit and loss statement or income statement, how they work and what they can do for you and your business. So what we wanted to do with today's podcast is to move that to the next level now and talk about dun dun dun dun the budget. Okay, so I know when people hear the word budget, I know how many people react because I used to react that way, which is I'm not doing that, and I don't want to do a budget. I did a survey, Joe, a few years ago of several agents, and one of the questions I asked him about money was, do you operate from a budget? And the overwhelming answer was no. And I really want to encourage everybody listening to this, too, is to take another look at that. And I think by the time we're done today; you'll have a pretty good idea on how to build one of these and what it can do for you.
I know. Going in upfront. The most common comment about a budget is, well, I'm not going to do it because they're too confining. I need more space in my life. I need more space in my business to be able to just kind of wing things if I need to. And I just don't want to operate from a budget. And I would just say to that, folks. If you look at the top companies around the world, small, very small and very, very large folks, they operate from a budget. And there's several reasons why they do it, and we'll get into them in just a second. I think the other comment I hear often about a budget is I'm not even sure where to begin. And that's what we're going to be helping you with today. All right. So, what are these for? Well, they're really a budget is essential for the healthy operation of a business. It basically what it allows you to do is control the finances of a business. What we're really doing here is we're going to pre assign where the money is going to go in a given month versus a conversation, I used to have a lot with my family is where did the money go? Where did it go? Well, in in a budget. We're going to know where it's going to go because we're going to pre assign it. It it's essentially a financial plan. It estimates our revenue. It restricts unplanned spending. It also ensures adequate spending in certain accounts, which we talked about last week. It highlights our strengths and weaknesses of our business. And it really gives us certainty that the business can meet its upcoming obligations.
It's our roadmap, so to speak. All right. So, what do you do? How do you go build one of these? It's not as complex as it might seem when you're first thinking about doing it. Incidentally, as we go through this today, I'm going to highly recommend, if you've not done this on a personal basis, that you also do it on a personal basis. They'll go hand in hand. All right. So how do you prep for creating a budget? What are your steps to get this thing going? First off, if you're a Keller Williams realty agent, you have access to a terrific tool called a multi-year trend. Talk to your team leader about it. They'll be able to point you in the right direction to find this and print it out. If you're not with Keller Williams, your company may provide something similar. And if not, we'll still give you ideas on how to get this built.
But a great place to start, especially agents, is just print out your multi-year trends. Now, this will show you things like the record of closed units that you have month by month. It'll give you month by month gross commission income. It'll give you month by month closed volume. It'll give you month by month, commission income and so on. It'll give you a month-by-month breakdown of several areas of your business. Okay. So that would be step number one. If you don't have that available from your company, then we have some additional things you can do. The next thing you could do is you could print last year's profit loss statement. Now here's what you want to do.
And incidentally, folks, this is just how I build them. You can go online, go Google it, check it out. You'll learn a lot. I'm sure there's probably even YouTube videos. I'm not sure. But this is how I would do it. I would print last year's profit and loss statement if it's available. It's not. That's a whole ‘nother discussion, of course, but I would print last year's panel. Now, I don't just want Joe a year-to-date panel. I don't want like January through December. I can do that. But really what I'm looking for here is a month-by-month panel I want every single month and we'll talk more about why we want to do that here in just a second. But print out every month last year of your profit loss statement. If you don't have a profit loss statement, then print out your personal checking account because most likely it's going to be in there somewhere and go through and highlight your income portions that came into your business and highlight any if you can identify them, business expenses. If you have a business checking account already up and running, which would be great, print your monthly statements from last year. Now some of you are saying, oh my gosh, I mean, this is a lot well, here's why we're doing it. It's good data in gives us great results on the other side of it. We need the data to be able to analyze us instead of just folks making up numbers and putting them on a Excel spreadsheet and hoping that we get close to it.
We're going to go from real data. And I'm promising you what I'm sharing with you is proven. It works, and it's going to it's going to be a great relief for those of you who have never done one of these before. Another great item to print would be your Schedule C from your last year’s income tax return, your most recent tax returns, print schedule C because Schedule C will account for your income on there, and it will also account for your varied expenses that you took as deductions. Even if you don't have business checking accounts, even if you don't have a PNL, if you did your tax returns appropriately and took some deductions and so on, they will be listed on your schedule c so get that from your accountant or you may have a copy already or maybe there's a portal you can log into and just get it get it from there and print that out. So what we're looking at here is we're looking for how much money came in last year in each month and how much went out last year in every single month. Okay. That's really what we're building here. Now, a couple of things to keep in mind, Joe, where I think people get mixed up on budgets or they struggle and here's what they do. They take and put down here what they what their goals are for the year.
This is not about your goals, folks. This is about the numbers you will hit each month. That's what this is about. This is about accuracy, and it's based on real data. So I would encourage you strongly encourage you not to just pluck some numbers from the air and put them in. Well, I'm hoping to make ten grand a month, so I'm going to put ten grand a month down. Well, first of all. We don't make ten grand a month. We make 4500 some months and 12 eight the next month and two five the next month and 2000 next month and so on. In order for us to get the best decisions from these documents, we have to give it the best information. And I hope that hope that makes sense. So we're compiling this data now. What I do when I'm taking a look at this is I'm saying, okay, I'm not going to let my biases enter into the numbers. The numbers are going to drive the numbers. So, for example, very common for people to say, well, last year, in June, I did $10,000. Okay. This year, though, I'm working a lot harder and I'm anticipating that I'm going to do 15,000.
Okay. If that's based on a pipeline report or it's based on contracts you've written, fantastic. If it's based on hopes and ideals and goals, then I'm going to encourage you not to do it that way. All right. So here's what we're going to do. Get a just a basic spreadsheet. Excel works great for just building a budget, to be honest with you. I'm sure you can also just build these in QuickBooks, but just go in and say, okay, in January of whatever year, what do I anticipate is going to come in based on what I typically do in January? What is my track record in January? What's what? What normally happens in January? And then plug that number in and be. Conservative. Again. This isn't your goals. Goals as a whole. Separate topic someday. This is accurate data. So you're going to go through each month. And I would always start with the income side here. So and if you're starting this incidentally in July, great start with July. Start right now and say what? What's going to be coming up in July for income? And you can look at your current pipeline report. You can look at your pending transactions and so on. You can look at last year's closed income and compile what you believe accurately will close in July. You do the same for August, you do the same for September and so on.
So a good exercise would be if you're midway through the year when you're listening to this, do a budget for the second half of the year. So stage one is we're going to build the income side of this. Stage two we're going to go through and we're going to look at our cost of sale, which again comes right off your schedule C, we'll have it. Or it's on your multiyear trends or it's in your PNL from last year. If you had a piano. Okay. And you're going to look and you're going to say, how much money did each of these transactions that I'm projecting to happen in July or August or whatever? How much money are you know, are those transactions going to cost me?
What will be my cost of sale in August, for example, or July, whatever then? And you're going to build that month by month. Then. It's time for the expense side of this. Now, here's what I do. So I'm not telling you what I've heard of or what I think or what I've seen on YouTube. This is just how I do it again. Seek professional tax and legal help here. But this is how I build. Build my budgets and my forecast, so to speak, is I, I print out. My monthly panels like we talked about earlier. And I'm literally going to go down through the expense chart of accounts or categories, if you will, line by line. And let's say the first category is advertising, for example. And again, we could have advertising print. We could have that broken down into several subcategories. But let's say they roll up to advertising and advertising is going to run me. You pick a number, okay? It averages $300 a month. I am okay for this part to average these out. If they if they tend to kind of, you know, end up that way. My fixed expenses are obviously going to repeat every single month. For example, rent. Let's say my rent is 700 a month for my office. Great. That's going to that's going to be repeated all the way through that that spreadsheet as rent for 700 a month. That'll go all the way through for the year. So each line item you're going to go through and you're going to look at it and you're going to say, okay, am I still incurring this expense? Maybe last year you had dues and subscriptions to some publications or something, and you're no longer doing those.
Okay, well, that number now goes to zero or whatever the new number is. So you're making adjustments based on what's really going on in your business to date. So, for example, maybe you've increased your lead generation budget. Maybe last year it was pick a number again, thousand dollars a month on average. And this year you've increased that by 25% and you have reasons for doing so. We're going to put those new numbers in here, and all we're really doing is we're building a PNL, if you will, in advance. That's what we're doing.
We're saying, Joe, here's what we expect the July PNL to look like because we're going to assign where the money's going in advance. So, for example, we're not going to get trapped with a really high lead generation number this month because it's not in our budget. We've got again, pick a number. We have $1,000 budgeted for Legion this month. We're not going to go out and sponsor some event that costs us 5000 because it's simply not in our budget. Now, does that mean you can't ever do anything like that? No, you can do it. But you just know you're doing a budget, essentially a variance at that at that point. Okay. So now you're looking at your PNL. You're going line by line through it, bank charges, legal accounting.
Now, let's say that your accounting bills are you have a small accounting bill every single month for maybe payroll or something like that, payroll service or whatever. And then maybe you have your tax prep. That might occur maybe in March or something, and that that number is higher in March. Put that in for March. You're going to put the numbers where they actually occur throughout your year. So when we're done and incidentally, this sounds like it takes you a long time. It's not as time consuming as you might think. The income side can take some time because you're looking at all the data points and you're saying, What do I really believe is my best estimate for what's going to happen in that month? Now, many of you might be saying, well, Todd, my income goes up and down every single month. How can I possibly do it? You look at data, you look at past data. If you're brand new to this and you've never done it before in your life in terms of real estate, you're brand new to the business, then. Yeah, we're going to be we're going to be doing some estimating, okay? We're going to be plugging numbers in as placeholders until we start to gather more or more data. Now, let's think about this. We've gone month by month and we've built the projected income for that month based on history here and current trends and so on. We've gone through and we've listed out the cost of sale in each of those months. And then we've gone in month by month and plugged in the potential expenses. This month, for example, maybe in February, you go to a major conference with your company and you do it every single year, and that runs you, you know, $3,000 or whatever. We're going to plug $3,000 in for that that month. Maybe I have coaching every month of $1,000. That's going to go in every single month under coaching. It's in our budget. Maybe we've in the past underfunded parts of our business.
Maybe, Joe, we've underfunded marketing. And we need to take a close look at that and say last year, gosh, we didn't invest any in marketing. This year we're not going to up that number by X amount. I am planning to hire a staff member in six months. Great. So under salaries or consulting or whatever your category is going to be. You know, right now that number might be zero. And in six months, you're going to plug in what you expect. You'll be paying that new hire. You're building a financial picture and you're building it in advance. Okay, so now what? Here's where the magic really comes in. Each month, you will plug this number into your QuickBooks or your accounting software, or if you're using Excel or your ledger or wherever, the budget will be put in there.
All right. And then what you're going to do is you're going to. Take your current PNL of actual income and expense. And you're going to you're going to print that pencil, let's say, the 10th of the month. For the previous month. And you're going to print out your profit loss statement. And it's going to have a category in there of what the budget was or what the forecast was. Sometimes they'll use that word and you're just going to do a quick side by side comparison. And these side-by-side comparisons are really where the magic happens for your company, because now you're paying attention, a close attention to the money. And I can promise you this. Here's what happens. I believe you're going to find that as you spend a closer you pay closer attention to your expenses. Your expenses are going to reduce in the appropriate areas. They may go up in areas where you need to keep funding, but you're going to get a better handle on your expenses. I believe your profitability is going to go up because you're focusing on it more. You're looking at your income and you're saying, why was my income so-and-so for the month so much for the month when I was expecting it to be much higher? What was the gap? What happened there? And now, folks, when you start to do this on a monthly basis, you can see, you can anticipate what the results will be. You're spending more time working on your business rather than in your business. You're working on the financial portion of your business. And I know it sounds like this takes all kinds of time. It really doesn't. Once you've established that budget.
And once you're entering all of your expenses, maybe through the same credit card every month and that's going into QuickBooks each month, you're then able to pull up what you believed was going to happen and what did happen. And here's some of the benefits that come from it. We already discussed some. You're going to see more scope creep where expense creep starts to happen. You'll just see it you'll see that year to date your expenses on lead gen should have been $3,000 based on what you budgeted, but they're already at eight. Well, that might be a good thing because you're seeing revenue shoot up and you're saying, well, I'm offsetting that with revenue. And my cost of sales is in line. So my gross margin is still really strong. See. You've heard the phrase before. Numbers tell a story in business. And numbers don't lie. They don't lie. What they do is they give you insight and they give you direction. And you get that by laying out in advance what you expect to be earning.
What you expect to be investing and spending and what you expect to have left over. And once you start watching that every single month, folks, you're going to go a long way in getting your 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 describing how to think about budget and how to execute them to make them work for your business.
Subscribe to stay tuned for more real-time financial strategies that will improve your real estate business!
If you are a real estate agent that is getting their money right and would like to be featured on the show, please email getthemoneyright.podcast@gmail.com
Show Links:
Get The Money Right Website
LinkedIn
Instagram
Credits:
Hosted by: Todd Butzer
Produced by: Joe Rodriguez