Welcome back to my series on business planning.
If you've been following along, by now you should know what your financial goals are for the coming year. Now what we need to do is figure out is what you need to do to get there.
What you need my friend, is a PROFORMA.
What is a proforma?
Definition:
“A proforma is a method of calculating financial results using a set of projections or assumptions.”
Essentially, a proforma is a well calculated guess.
We use these in two ways:
To forecast our businesses potential
To review and measure against so it continues to be refined
So how do you start?
First, figure out what you need to gross:
The first thing you need to do is sort out how much of your money will be lost to expenses and costs associated with completing a sale. In real estate you have two main categories of costs:
Expenses - things you pay for as you use them, like office supplies and marketing materials
Cost of Sale (COS) - costs associated with closing deals, like referral fees and office or team splits.
These vary widely but we typically see most businesses spending as much as 30% of their gross revenue in each category. Read in reverse, that means that most real estate businesses are only netting around 40% of their gross revenue.
Sorting out what you need to earn is pretty simple: you just divide the amount you want to net by the % you expect to net from your gross revenue.
Example:
Net goal is $100,000
Net % after COS and Expenses = 40%
$100,000 / 40% = $250,000
In this example you would need to sell $250,000 of real estate in order to net $100,000 before taxes.
Here are some useful guidelines you can use to experiment. I suggest you air on the side of caution and be conservative with how affordable you think you’ll be able to keep things. It’s better to be cautious and end up better off than you thought:
Brand new agent: Expect to net 40%
Middle producing agent who is very frugal: Possible to net up to 60%
High producing solo agent who is very frugal: Possible to net up to 75% (very rare)
Small but growing team trying to build new systems: Expect to net 25%-35%
Large established team which is well run and cautious with expenses: Possible to net 40%
Poorly run team of any size: Netting less than 10% is common
Once you know how much you need to gross, all you need to do is sort out how to get there.
The Proforma:
I’ll share a sample real estate proforma in a moment, but let's zoom out for a moment. This is a practice which predates real estate, so let’s talk generalities to get started.
In any sales cycle, you will have several key moments where the likelihood of a sale is greatly increased if things go well. In real estate the perfect example of this is a first meeting with a qualified client. We call these Appointments: a meeting with a buyer or seller to discuss them committing to you as an agent. Obviously if you are amazing at these meetings, you will secure more clients than someone who isn’t.
So this means that we want to focus on appointments in our proforma. Specifically what we want to do is focus on the “Conversion Ratio”.
A conversion ratio is the ratio of people who move to the next step in your sales funnel. So, for example, if you meet with 10 qualified sellers and 7 of them agree to list their home with you, you have a conversion ratio of 70%.
Similarly, if you have 10 people sign listing agreements and you sell 8 of them, you have a signed to sold conversion ratio of 80%.
Every time you have some falloff, you will raise the number of the preceding conversion that you need to hit in order to reach your goals.
Considering the model of real estate, your proforma would likely contrast buyers to sellers:
average commission
appointment met to signed ratio
appointment signed to sold ratio.
My annual tradition:
Every year I do business planning, and every year I try to work out the easiest possible way to create a working plan for my business. The Proforma is an integral part of the business plan.
I first sit down to write business plans for myself
I then help write business plans for the people I coach
Finally, I try to recreate a “better version” of a proforma I learned from one of my favourite books.
Every year I try to make it more simple, pull out a few key conversions to make it simpler to calculate, resulting in a performa that's just about perfect.
So before I share the proforma, I’m going to give a shoutout to a personal mentor of mine and author of “The Millionaire Real Estate Agent” - Gary Keller. The Proforma is referred to as the “economic model”.
Watch/download a video and worksheet from my agent academy where I share thoughts on how to set goals AND I go through the “Economic model” from Gary's Book - BELOW
If you look at page 2 of the pdf I’ve included you can see that the top half is used to sort out how to determine what your true gross income goal is. There is also room to fill in what your budget for cost of sales and expenses will be.
Once you know your gross income, you divide it by your average commissions to figure out how many deals you need to write, then you split those deals between buyer deals and seller deals.
From there all you do is work through your conversions, dividing the deals by your conversion ratio.
For example: If you need to close $100K of income and your average commission is $5K, you will need to close 20 deals (100/5 = 20). From there, if half of them need to come from buyer and half from sellers, you would multiply 20 deals by 50% and find that you need 10 buyer deals and 10 listings.
Once we have that we work our way down each side so we can sort out how we will get there.
Conversion ratios:
To close X number of listings, how many listings do you need to sign?
To sign X number of listings, how many appointments do you need to attend?
These are your 2 big questions, and they make a BIG difference.
For example, let’s go back to your goal of 10 listings closed:
If you sign 50% and close 50% you would need to attend 40 qualified appointments (10/50% signed = 20, 20/50% closed = 40)
If you sign 80% and close 80% you would need to attend only 16 Qualified appointments (10/80% signed = 12.5, 12.5/80% closed = 15.625 - we always round up)
If you aren’t sure or you are new to the business, use the golfers mantra:
Plan conservatively and play aggressively.
What you want to do is assume the worst, play hard and prove yourself wrong. This way you can’t lose!
I usually tell new agents to factor somewhere between 50-60% conversions at each point and then MEASURE their results and use what the measurements tell them after they’ve been at it for a while. If you do it this way you won’t come up short, and trust me, 50% isn’t that low.
Here’s the thing, all those appointments which went to waste are easily recaptured if you start applying yourself to training. Spending a little time every day focused on upgrading your skills and process is what will move you from needing 40 appointments to reach your goal to only 16.
Measure each of the conversion points on the model and search for people who out perform you so you can model their tactics and raise your conversions. Once you have pulled from a few proven models you can start making tweaks of your own… pretty soon you’ll be converting at 70-80% or higher.
This is the fun part of the proforma process. Looking BACK at it and seeing where it played true and where it missed and making improvements. You might notice a drop off at certain points and realize you have a huge opportunity if you can just change that one spot!
Suddenly you have something tangible to dig in on!
If you don’t find this yet, put some thought into how many hours you would spend attending the extra 24 appointments from above which didn’t convert… not to mention the time spent prospecting, qualifying and confirming them. The more efficient your machine becomes the less you work to get the same results, or you keep working and get better results.
I challenge you to sit down and make sense of this for your business, with your goals and your skill level. The cool thing is that in the end of things it boils down to you having a clear and singular focus: “All I need to do to earn 100K this year is attend 1 qualified appointment each week” for example.
Nothing else matters more than that - clear the rest out of your way and go get it!
Happy hunting! Feel free to hit me up and I’ll send you the video where I walk you through how to do all the math and cover some bonus material on time blocking and appointments!
As always, thanks for your time.
S
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