Three More Numbers for Business Planning

In our previous article, we shared three statistics many broker/owners don’t know about. Here are three more that can give you a better insight into where your company is and help you plan for next year.

1. Pending Company Dollar

Pending Company Dollar represents what is due to close in the future, after payout to other brokers and sales associates. It helps you predict your upcoming profitability.

For example, if you have $200,000 in pendings and your monthly expenses are $100,000, then you have a 60-day pending company dollar.

You are likely not profitable at this point, as any fall-throughs will result in you not covering your expenses over the next 60 days.

90 days might indicate break-even or better, and 120 days is a healthier measure of profitability.

Of course, seasonality does impact this measurement. You will likely have less coverage during the winter months. However, to reduce the risk of loss, either you need to increase productivity through recruiting and same store productivity increases or through reducing your fixed expense base.

Also, be aware of production that is slated to close well past the 120-day mark, such as condos, commercial or new homes. Certainly anything due to close more than 6 months from now should not be included in your calculations.

2. Cancellation Rate

Cancellation Rate measures the % of your transactions that cancel or do not close.

Cancellation rates should not exceed 5% in conventional markets and 10% in markets that have large government or relocation business. 

If the Cancellation Rate exceeds these numbers, then you need to look at the quality of the contracts and clients and provide training or support to those sales associates who need it.

This measure is closely related to Pending Company Dollar, so in order for that measurement to be reliable, you have to understand and manage your Cancellation Rate.

3. Average Commission Rate

We all hope that in our markets, “full commission” is charged and collected. In many markets across North America, 5%-7% would be deemed full commission.

However, with competition, market pressures, and clients who are more sophisticated due to the Internet, it has become increasingly difficult to achieve full commission on all sales.

If you are building your profit plan around a 3% commission per closed side, you might have some problems. The reality is that you will realize less than 3%. It is better to build your plans based on realistic assumptions.

You can certainly get the historical data for your company and your trading area to determine what your actual commission rates are. Most real estate accounting systems will also provide you with that information.

If you are averaging less than 2.5% per closed side, your profitability is at risk. 2.7% or higher is a better target in conventional 6% markets.

The best way to ensure you get to the average rate you need is to provide effective negotiation strategy training to your sales associates. It is easy to discount to get the business, but it costs the associate and you in the long run.