Shift Tactic #2: Re-margin Your Business – Lessons on Expense Management

Garrett Lenderman | April 21, 2020

While SHIFT was first published over a decade ago to help agents navigate difficult economic times, there is no time greater than the present to implement its tools and tactics. Especially in today’s business landscape, which has presented new challenges that have had a dramatic effect on the economy, our businesses, and our lives. 

As Gary Keller writes in SHIFT, “When the market turns, it is time to roll up your sleeves and for everyone around you to do the same.” 

This article is the second of six tactics we will publish that have been outlined in the book. Collectively, our SHIFT series will help you implement time-tested practices so you can thrive through industry and economic change and place your business in the best position possible. 

Getting Financials in Order

Many of us loathe the idea of a spreadsheet, much less needing to create one. But we have to adopt a realistic mindset if we’re going to succeed in the market of the moment. Whether we feel it or not, we’re in the middle of a shift, and that means we have to get smart about how money is flowing through our businesses. There’s no room for gut decisions. Shifts are budget-breakers, and if you don’t pivot your expenses, they can be business-breakers.

So, gear up and get your financials in order. It’s time to get lean!

Operate from a Budget

“There is no cut too small. You must reduce expenses to match your income plus an acceptable profit margin. Be brutal. Cut! Cut! Cut! Cut once, cut twice and then keep cutting every week until you’re there.” SHIFT, p. 34.

If you haven’t built the habit of working within a budget, now is the time to start. The key to creating a good budget is to build it with the end in mind. Beginning with the profit you want to see your business produce at the end of the year, build an expense plan that will produce those desired results.

For instance, if you want to achieve a 40% profit margin, that means you’re left with 60% of your revenue for expenses. If you’re following the Millionaire Real Estate Agent model, that means 30% will be set aside for your cost of sales and the remaining 30% for your operating expenses.

Putting our profit margin first gives us a structure for our expense management. It reframes our mindset into placing priority over our expenses. It forces us to reconcile with the fact that a lot of our “must haves” are actually just “nice to haves.”

For every expense in your budget, you should know two things:
1. What dollar amount you expect to receive in return.
2. What date you expect to receive that return by.

The time for nondiscretionary spending is over. The time for accountable investing is now. If the expense doesn’t meet the return you need by the date you need it, place it on the chopping block.

When looking at your lead generation budget, you might need to make tough decisions between expenses that promote your brand and those that generate clear results. For instance, the success of branding expenses like swag, bus-stop ads, and even some social and banner ads have proven difficult to track and measure over time. It’s a problem that prospecting calls, open houses (as long as they’re safe), and marketing that contains a clear CTA don’t have. 

As a general rule, if you can’t measure its success, its viability should be scrutinized.

Lower Your Liability, Increase Your Flexibility

When looking at your budget, you should be able to categorize each expense into one of two categories: variable or fixed.

Variable expenses are costs that are TBD. These include a lot of “as-needed” services that once used, are paid for. They can also include expenses with scaled pricing options based on use, and cost of sales expenses where payment is due upon closing.

Fixed expenses are hard costs that your business has committed to incur. They aren’t subject to change and at the end of each week, month or year, you’re expected to foot the bill. Most of your overhead will find its way into the category of “fixed” expenses, and during a shift, should be under the extra scrutiny.

When re-margining your business, the first thing you want to do is cut as many fixed expenses as possible and, when profitable, turn as many expenses that are fixed into variable. This is a good time to call your vendors and try to renegotiate your expenses. You might find that, in this economic climate, businesses are willing to move from a fixed pay schedule to variable.

The key here is to reduce your liability and increase your flexibility. In a shifted market, cash can sometimes come at a premium. It’s important to have the ability to roll with whatever punches might be thrown your way!

Maintain a P&L

“The number one determinant of thriving is lead generation, but the number one determinant of surviving is expense management.” – SHIFT, p. 29.

We can’t treat a budget like a frozen pizza where we stick it in the oven, “set it and forget it.” In a shift, our results should drive our decisions, not our expectations. If an investment is underperforming, we need to know about it so we can adjust our budget accordingly.

The tool business owners use to track the financial results of their business is called a Profit and Loss statement. (P&L for short.)

A P&L is a balance sheet that shows the flow of money through your business. It compares your budgeted expenses against your actual expenditures. In addition, it should show you how those expenses are performing over time.  

Every business owner should maintain a P&L and review it on a biweekly basis. When looking at your P&L, you should line up multiple weeks’ worth of information to show trends within your finances. Look for any variances between your budget and your P&L and track the return on each investment you’ve made.

If you take anything away, let it be that the trick to maintaining a good P&L and staying profitable in a shift is to leave no stone unturned. Challenge every extra penny spent. While variances that “feel right” might skate by in a booming market, in a shifted market where every penny counts, they don’t. If every expense is justified by how much money it adds back to the bottom line, your business will come out of this shift stronger than it was before you entered it!

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