The Budget Model: Your Path to Profitability

January 28, 2020

This article is the third in our “Back to Business Basics” series – one that is aimed at helping you achieve greater success by using models outlined in Gary Keller’s The Millionaire Real Estate Agent. The MREA gives you the “how” to achieve your goals and shows you where to focus your time to achieve the greatest impact. That’s because successful agents have left clues: which of their actions led to their desired results. The MREA is a compilation of those clues.

Since its original publication 17 years ago, the MREA has sold 1.3 million copies – withstanding market conditions and the test of time to help both new agents and seasoned pros alike.

Stop reinventing the wheel. Let the MREA be your guide.

“Reinventing the wheel every time is just plain exhausting work. And it leads to breakdowns and burnouts. On the other hand, I think you’ll discover that modeling will be very empowering. In fact, it may make things appear so simple it feels like cheating. Powerful models usually feel that way.” – Gary Keller

The Budget Model

Your financial freedom begins when you stick to a budget. It may seem counterintuitive that adhering to a strict plan for spending will ultimately lead to the freedom to spend your money – and time – in ways that are most important to you, but it’s true.  

The keys to budget success are to implement the MREA’s Budget Model early in your business, keep it simple, plan annually, review regularly, and stick to it.  

Whereas the Economic Model helps you understand where your money is coming from, the Budget Model explains what happens to that revenue between the time you receive it as gross revenue and keep it as net income. Its purpose is to highlight where you should focus your attention to reap the highest dividends.

According to the model, your business budget is divided into two broad categories: cost of sales and operating expenses. There is no miscellaneous sub-category under either.

Follow the “Sample Profit and Loss Report” as detailed in the MREA in Appendix A, pages 349-355. Every expense must fall into one of the categories, even if you do not spend in every category.

The cost of sales is the actual cost of capturing and converting leads into sales. Operating expenses are everything else. Your “big two” that will consume about 78% under operating expenses are salaries and lead generation.

Spending: Lead With Revenue 

When it comes to spending – you must only spend what you earn. When you start a new business, that can be tough. But minimizing your start-up costs and debt will help your business survive. The “if you spend it, they will come” approach is no guarantee that you’ll see a return on any investment in marketing or infrastructure soon enough – if ever – to benefit your business.

“Casual spending and the phrase, ‘This is only the cost of a commission from one more sale’ are the bane of a Millionaire Real Estate Agent.” – Gary Keller

Play Red Light, Green Light

Once you begin spending, the model guides you to focus on the results you’re getting rather than the amount you’re spending. Meaning, hold every dollar accountable for results. To insulate your business against unexpected shifts in income, keep fixed costs – e.g., rent, salaries, leases – as low as possible.

When you find your expenses creeping up in cost – and they will – without a corresponding increase in results, it’s time to pull out a stop sign and reevaluate that expense. If it’s generating more revenue than it costs, give it the green light.

Question, Assess, and Build in Accountability

Be in the habit of questioning any new expense. Each new request for purchase, marketing plan, or staff addition should be presented with a detailed budget that specifies how the expense will increase income, save expenses, or create higher productivity.

Avoiding impulse or urgent spending will protect your net income. That’s easier said than done, right?

“Stick to your budget and when you have to spend outside of it, make sure the move is absolutely justifiable.” – Gary Keller

If you, the business owner, are the person struggling most with spending outside of the budget, find a pro such as a CPA or financial consultant to hold you accountable. Schedule regular budget review meetings with them, then heed their advice. If you don’t deal with your off-budget spending early in your business, the problem is only going to get bigger.

Pro tip: One easy way to avoid bad spending habits is to separate your operating account from your deposit account. On a schedule, only transfer from the deposit account what has been budgeted. Require an expense justification form – a written and signed form – for every modification of the budget.

“When you build in systems and processes, they tend to serve two purposes: First, they help you keep your good habits and do the right things; and, second, they make it very, very difficult to regress into old bad habits and do the wrong things.” – Gary Keller

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