Real Estate Agents have a unique challenge when it comes to their income. With uneven cash flow, but fixed monthly bills, it becomes a challenge to figure out how to make it all work.
I often hear from my real estate professional clients in my home city of Salt Lake City, as well as across the country, that it doesn’t ever “feel” like they are making that much money. It’s hard to believe, because I work with some very successful real estate agents. But, the problem is common across all income levels in this profession. If this is you, trust me, you are not alone!
THE IDEAL CASH FLOW SYSTEM ALLOWS YOU TO GET PAID FIRST.
Then it helps you to account for expenses and taxes.
By far, the largest forgotten expense to set aside is taxes! Yes, you get your estimated tax payments from your accountant each year, but I have yet to come across a real estate agent who was actually setting aside money from each commission to go towards those estimated taxes later down the road. You know what I’m talking about…the stress you feel each time those deadlines approach and you realize you already spent that money! You tell yourself, “next quarter I’ll get it paid right away”, only to find reasons to spend that money ahead of taxes. No longer!
If you haven’t read or listened to the book Profit First by Mike Michalowicz, I highly recommend you do. I know real estate professionals have little free time, but give it a listen while driving around.
Essentially, the goal of the Profit First Formula is to develop a system for building your business in a sustainable way that creates long term success. You accomplish this by creating smaller spending buckets, rather than one bucket called “whatever is leftover goes to expenses”. Or worse, “whatever is leftover is my income”.
This system is going to require you to set up some bank accounts. There are plenty of banks that offer free checking accounts, but if your bank does not, Relay Bank is a bank that plays nicely with Profit First. On a side note, if this begins to feel like too much work, I would recommend looking for Profit First certified bookkeepers. I personally use a Profit First bookkeeper, and it has wildly changed my business for the better, allowing me to focus on working with my clients only!
HERE ARE THE BANK ACCOUNT CATEGORIES THAT YOU WILL NEED TO OPEN:
- Income/Commissions Account
- Profit Account
- Operating Expenses Account
- Owner’s Pay Account (Your Pay!)
- Taxes Account
Once you have your subaccount bank accounts open, Michalowicz has you access your Current Allocation Percentages (CAPs). But for our purposes, let’s just assume that these sub categories were not getting broken out from your income.
Even more important is what Michalowicz, calls your Target Allocation Percentages (TAPs). This is how your money should be divided out by percentages to each of their corresponding newly opened bank accounts. It is specific to your income range and will adapt and change with your business maturity and factors that you can’t control, like the economy and housing market.
THIS IS WHAT MAKES THIS PROFIT FIRST SYSTEM SO GREAT!
Whether your income increases or decreases with uncontrollable factors, the Target Allocation Percentages change in stride.
Before we look at the recommended allocations, I want to first note that this should NOT be an overnight transition, but something you should try to move towards over the course of 6 months to a year. You can’t operate a successful business by slashing all of your expenses, just like you can’t grow your way to a financially successful business by adding a bunch of new expenses.
Now that we got that out of the way, see Michalowicz’s TAP’s below, based upon your income:
Source: Mike Michalowicz. Profit First (2021). Retrieved from: https://s3.amazonaws.com/ProfitFirst/Graphics+%26+Charts+From+Profit+First.pdf
These percentages sound great, but you may not fit perfectly into those boxes. This is where you need to get really clear about what expenses are critical to operating your business and which expenses are just nice to have. If certain expenses are just nice to have, I strongly encourage you to consider a plan to cut those expenses to bring you back to the TAPs.
For real estate agents, income payments are unpredictable. So, instead of a set date each month to allocate out your TAPs, I suggest transferring money between your accounts immediately after each commission.
Don’t leave the possibility of that money getting spent, distribute out your income immediately.
And remember, PROFIT COMES FIRST!
If you have any questions specific to your real estate business, don’t hesitate to reach out. I’m happy to help you pursue a more profitable future.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
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