Sanity not vanity…

Sanity not vanity…

Within the last seven days, I have encountered two firms (one estate agency, another in a different but similar industry) who are outwardly successful but who are both on the road to disaster once I stripped away the veneer of their operation.

Two simple business mantras might have saved these two firms. “Cashflow is King” and “Turnover is vanity, profit is sanity.”

Many practitioners recognise that booming market conditions are often followed by tougher times and therefore review all sorts of elements of their business, including preparing new strategies to deal with different market conditions. This kept many afloat where others failed in the last downturn.

Other companies are less swift in embracing change, assessing the market as “great”, both now and for the foreseeable future. A dangerous optimism.

Financial planning

While carrying out consultancy work, we work on a number of key areas including financial planning and budgeting. It is interesting to note how many estate agency firms talk in terms of turnover rather than profit. Equally interesting is the number of business owners who don’t know the detail of the costs of the business and thus the levels of business at each stage in the estate agency process that are critical to ensure profitable trading.

The cashflow situation is obviously a crucial area, and we conduct the simple exercise of assessing the money likely to hit the bank account over coming months and the anticipated costs for the same period.

Detailed review

The first step is to carry out a detailed review of the quality and quantity of the “sold subject to contract” stock. Staff are occasionally slow to remove a sale from the figures in the hope that it will come back together. But for the purpose of this exercise, only bona fide transactions should be included – in other words, where a chain is complete top and bottom. The fee amounts should then be added up, so that a true grand total of future STC pipeline income is reached. This is then added to the fees of sales which have exchanged but not yet been paid. A total “pot” of forthcoming income thus appears.

By reviewing previous company data, it typically emerges that traditionally a certain percentage of this “pot” translates into bankings over a subsequent four month period. By applying this ratio to their current scenario, a company could reasonably accurately calculate the following four months income.

Income from lettings and property management should be assessed in similar fashion.

The other side of the financial equation is a detailed forthcoming costs assessment, to cover the equivalent period.

A list of all likely outgoings is prepared and a line by line forecast is carried out. Each element’s prediction is reached by way of the study of previous expenditure along with careful consideration of certain known quantities. Staff, cars, rent, rates, utilities, advertising, portal costs, technology, insurances, tax and so on.

In my experience, in many cases, agent’s first guesstimates at future costs are lower than a detailed analysis reveals.

Once each expenditure line has been agreed, a total of the following period’s outgoings can be reached. This is then subtracted from the previously agreed income forecast.

In the case of the companies for whom we carry out this financial health check, the results are varied. For some, the figures are encouraging, and the positive balance can indicate the level of funding that might be available for business development or for putting in the “war chest” ahead of tougher times. For others, the calculation makes concerning reading, although the very fact that a future negative scenario had been identified allows the firms in question to plan strategically to increase income and drive down costs before the situation becomes insoluble.

Just last week, with the aforementioned agent who brought me in as a consultant, the above exercise revealed a likely loss over the following four months of almost &40,000.

What to do

With our guidance, the owner of this company took a series of decisions under the “increase income” and “reduce costs” headings. The former included adding value to their service to vendors to justify an increase in fees, quoting fixed fees rather than percentages to protect income amounts in the event of properties selling at lower prices and making more of other income streams such as financial services, conveyancing and survey referrals.

Staff are being trained in key disciplines, and targeted to achieve appropriate levels of income. The remuneration structure will change to reward income rather than simply units.

As far as reducing costs is concerned, marketing and advertising budgets were reviewed and a series of minor changes made (for example, staff erecting and changing boards) which once combined brought costs below the forecast income levels, thus ensuring profitable trading.

We will carry out these financial reviews at the end of each month with this firm and suitable business decisions will be made accordingly.

I fear for those adopting the “ostrich mentality” of burying their heads in the sand and expecting the market to stay busy forever. After all, night always follows day…