So, talking about a real estate team’s profit and loss statement. I know this is not sexy talk for a lot of people out there, but I cannot tell you how much, how many different ways this impacts the mindset of a team, in a positive way.

Because without it, you go into emotion. You go into very negative places, and you typically will see this with seasonality. You will see this really bad in the winter when there is not a lot of production. It also happens to coordinate with tax time. As you move into the month of April, you start to see it, because most people use an accountant just as a tax preparer, which to me is a horrible thing. Your accountant needs to be a CFO for you too. And unfortunately, they do not have those. They do not have the really good accountants the top corporations do. They just try to reduce your taxes.

So all of a sudden P&Ls look much, much different than they should look to a business. So it is very important to understand that difference, because very few real estate teams have a CFO. They just have a tax preparer, so they see a very negative side of things. And we have seen that especially when sales volume drops.

And when that happens, we get into scarcity mindsets. We start to act off of emotion a lot more than we do logic, and we are not playing with the right information. If we do not know how to analyze the profit and loss that our accountant provides us, we just start to go into scarcity. This is not working. I need to make changes.

So it is no wonder that we have seen so many people gravitate away from doing this themselves. A lot of teams have just given up building a real estate team with any type of profit margin whatsoever and started a team at a new revenue share company. “This is my new team. I do not make as much off the agents this way, but I am going to move in that direction.” And you see it all over the place. People just doing what I call lateral moves. They are changing their entire business model just because they cannot analyze a P&L.

And they operate off of emotion, not logic. I am tired of putting in money. So that is why we call the winter the moving season. So many agents and so many teams move during that period of time and they declare that it is not working. So they make a change, and they give up, and they put the white flag up, and the idea of them ever getting out of production, or at least even having more production from the other agents than themselves, goes away. So they make lateral moves and they justify it to themselves based on emotion, not logic.

So with that being said, I want to jump into this, because we want to prevent that. We want informed decisions. We do not want emotional decisions that are so pervasive in the real estate industry.

Okay, so I am going to show you something very quickly first. Everything that I am talking about is in our Agent Financials course, including the image I am about to show you. So we have a course on this that explains it in much greater detail. I am going to give you a real quick overview right now.

We have a real estate team budget schedule. Each column represents the amount of total sales volume and gross commission income. And the numbers do not matter too much here, believe it or not, if they are all that accurate. So as you move up in production, you move from left to right across this schedule, and I stop it at $100 million. We have a lot of teams we coach that go way past that too, but you start to get the trend here. I just want to explain the concept for you, because most people that give up are before they hit $100 million in sales. Most people that put up the white flag, they are in that small team conundrum where they have to both sell a lot themselves and manage the leadership of the team. And that is double the work for just a little bit more money. That is where most people put up the white flag and quit.

So the first thing I want you to look at is these numbers down the left hand side. The first thing we take a look at is the team’s total gross commission income. Then we go down to number two. We look at the team’s operating expenses. We always hold that at 30%. And the two big pieces of that are 2a and 2b. They are administrative salaries, and they are marketing and lead generation. So we try to hold operating expenses at 30%, and then administrative are 12% of GCI. Everything is taken from GCI. So operating expenses 30% of GCI, administrative salaries 12% of GCI, marketing and lead gen 10% of GCI. And we hold those numbers all the way through. Those do not change a lot.

What does change is number three, the cost of sales. This is, for all intents and purposes, what we pay our agents. It is their agent dollar from a commission split. If a team is on a 50/50, 50% of that commission split goes to the agent. That is the agent dollar. 50% goes to the team. That is the team dollar. So cost of sales is what is paid out to the agents, and you will see this number does change. A very small team, maybe with one or two buyer agents, still most of the production is coming from the lead agent, the team leader. So only 10% is paid out. But as the team grows, you are going to see this number goes up, because you are getting more and more agents and a higher percentage of your production is coming from other agents. So the percentage is going to go up, because the team leader can only sell so much. And the dollar amount is going to go up. And quite frankly this number is probably going to keep going even past this chart, because that is the idea. Get out of production and get a lot of production from your agents. But unfortunately we start to say we are paying all the agents too much, and bad decisions get made there.

Then net income is number four. Again, your net income percentage will always go down as you grow. The percentage will go down. That is your profit margin. Believe it or not, we actually, like any business, try to push the profit margin down while the net income amount goes up. Why? Again, more production is coming from your other agents, less coming from you, and the amount that you sell, you typically keep all that.

Make sense? Very simple. Remember these numbers: 1, 2, 2a and 2b, 3, and 4, because that is primarily what I am going to analyze when I take a look at the profit and loss. I am not going to look at too much outside of that. Again, this sample profit and loss is also in our Agent Financials course with some analysis. Now this gets a little squirrely because there is a lot of my chicken scratch all over it, but again, if you follow the numbers in order, 1, 2, 2a, 2b, 3, and 4, it should make sense to you.

So moving over to the P&L. Here we go. Hold your breath. This is where people freak.

Now you can take a look here, starting at number one. Remember, start at number one. The first thing we are going to do is calculate the team’s GCI. Very easy. Typically what is going to happen is your accountant is going to show a GCI amount which is really just the amount you earned. So we do not know how much you paid your agents, because you typically do not tell that to your accountant. That is just your commission. We can take out, if you have a property management or something, how much revenue you had. This is just revenue. It is money taken in. It is team dollar, agent dollar.

And we have to start there, because we take everything from GCI. Remember, this is the team’s GCI. So what I need to do also when I am calculating the team’s GCI is see how much we paid our agents. So we have to find out the agent dollar. Remember, it is the team’s total GCI. So please understand this. It is how much the team made, not just what you showed your accountant. So if we paid, in this case, about $99,800 to our agents last year, we are going to add that to how much you made to get a total team GCI of $454,433.

Everybody with me? Now we have got our 100% number. So we are not going to see that number on a P&L. We are not going to get the cost of sales, the cost of what we paid to our agents with each sale, on a P&L. Now some accountants will do that for you, but most do not. So we are going to have to find that just by our own records. Maybe your brokerage office keeps those, and we can add them up. Whatever it is, we always have to know what we are paying our agents.

And so we have got a 100% GCI number of $454,433. Then we are going to go down to number two and look at our operating expenses, and typically they will have a total expense amount that is extraordinarily high. A big old number that scares the heck out of clients. It is one of the reasons they say my business is not making money, because they see that number down at the bottom. Just by looking at this, you could see I made $354,000 for my GCI that the accountant listed, and I look and I made $250,000 in expenses. I only made $100,000. I would be better off as a solo agent making $300,000 myself. That is where teams go. But unfortunately they are not looking at the real picture. That is why we have to do this analysis.

So we have to calculate their true operating expenses. So we take the number that the accountant gave us, and then usually we are paying ourselves a salary too, so we have to deduct that from it. That is not a real expense. Come on. That goes right back in your pocket. So if you are getting paid a salary or a draw or something like that for your corporation, or however you want to take it in for whatever entity you have, we have to put that back into this equation. So I just deduct it from the operating expense, because it is not a true expense. Make sense?

Then we jump down and that gives us a new number of only $197,000 in expenses. Then I am going to go through and take a look at 2c up here. That was not on the first schedule. And I am going to look for all the personal crap they are putting in here. And I get it, your accountant wants to not make you have to pay a lot of taxes, and that is cool, but we are analyzing your business now. So if you went through a divorce and you said it was your business attorney so you could deduct it, we are not going to do that. Your business is not really losing that money. Same with health insurance. You are probably going to need that anyway. Your car payment, you are probably going to use that anyway. Cell phones, we are going to use that anyway. You bought two new computers and printers for your house and your kids, but you put them under your business. We have to be real here. We are analyzing a business.

So we are going to back out the personal expenses, and here I added them all up, and in this case it equaled $31,000. And now we have got a true operating expense amount of $163,000. Doesn’t look so bad anymore. Still a little bit high, because they are at 36% of GCI, and we remember on my budget schedule they should be at 30%. So they are a little high. Maybe we just need to recruit a little bit more production in rather than just cut the expenses, because typically the percentage will go down if we get a little bit more production. So five agents and their production might bring that down to 30%. So you can grow through it with production.

Now I also like to play red light green light with expenses. I do not want to expend anything more until we have got that down closer to 30%. So I do not want to increase my operating expenses either. So I am going to put up a red light right now, because we are at 36%. We are not going to spend another nickel until we can increase our production a little bit. And typically with real estate teams, that is going to come from adding more agents to the team. More agents come in, that will increase the GCI, and this $163,000 amount will be a much smaller percentage of it, and that percentage will come down to 30%.

That makes sense. And so now the real estate coach is telling the real estate team leader, you have got to recruit. And you have actually just proved to them why, because they do not want to hear that. They want to change, because recruiting is the hardest thing in this business. Just like to an agent, lead generation is the most important thing for them, and it is the hardest. They will do anything they can to justify not doing this. But they are on the right track here.

Does this make sense? I also want to make sure of the two biggies that I said. 2a, their admin salaries, is a little bit high right here. Should be 12% of GCI as I showed you on the budget schedule. They are at 15%. And typically we have to add payroll taxes with how much we are paying them in salary and things like that. Then I am going to look at their marketing expenses as well too. How much are we doing in advertising and marketing? And that needs to be below 10%, not too far below, or we are not going to grow, because marketing does increase revenue and agents. But they are at 9.1%, so we are pretty good on that one. We are a little high on admin salaries. We can probably grow into that too by bringing on more agents.

Now the net income number is also usually historically low, because that is your CPA’s job. On that, I want to make sure that we take a look here. Here is the net income number of $103,000. I am going to add back in, so I am going to take that number of $354,000, which is your gross commission income, I am going to subtract the operating expenses that I calculated under number two, the real operating expenses, and show them a new net income of $150,257, which is now 33% of GCI.

Does that make sense? What this tells me, just from this particular team, is yeah, they are a little ahead on their admin expenses, which is actually pretty rare for real estate teams to invest a lot in their admin. Generally speaking, if we were a little larger, it would be justified. This would generally, without me knowing what is going on with this team in particular, because I made all these numbers up, tell me we need more agents. We need to recruit through this. This is not a time to be switching gears. We are just not big enough. Our agents only brought in that $99,800 of production. Most people that start a team are up in the hundreds of thousands of production. We need to get bigger if we ever want that team leader to start getting out of production and get more from the other agents. That is very important.

So it makes sense that doing this analysis creates so much of, oh, okay, that is the reason I need to grow. That is the reason I need to generate more business. That is the reason I need to recruit more agents. That is the reason, because I built the foundation. I need to grow through it.

Now if we see their operating expenses are up at like 50% or things like that, it will reveal a lot of other things too. But I would say seven, eight times out of ten, they just need to grow through it. And that is just not what anybody wants to hear, because more recruiting appointments is the last thing anyone wants to do. Just like more lead gen contacts is the last thing any agent wants to do.

So what they do is they gravitate out and they look for greener pastures. This is not working for me. I need to go to this company, or I need to try this format. And they never get through that small team death zone, which is a true death zone. As much as people want small teams, they always burn out on them, because again, they are doing twice as much work. They are still selling just as much as they always have, and they are dealing with recruiting, retention, training agents, and all the drama that comes from agents, and they are just making a little bit more. It is not worth it, and they start to think it is not worth it.

But they were so reluctant to recruiting. They started using words like selectivity. I only want agents that will do this. Anything they can to justify not growing through this problem. You will hear it all the time. I do not want a big team. I do not want a large team. They just want one a teeny bit bigger, and that is fine. Just understand you will always want that, and pretty soon it will be a big team, because each step gets you more income and gets you less work at the same time, and people generally gravitate in that direction.

What we do not want you to do is get stuck in the middle, in that small team death zone, where you start to see I cannot go forward anymore. You can. Because your mind will start turning into crazy town and start telling you this is not working. Generally speaking, what we see is it is working. We need to keep growing. Usually the gas pedal is our biggest problem. It is not usually expenses, but it feels like it, especially in the off seasons, the winter months for most people.

Anyway, hope that helps analyze your P&L. Get a coach to help you do it. At least take my Agent Financials course and start knowing the back end of your business. Do not just be all sales and marketing. It is very important. We know the operations side too. Thanks.