When you first start your business, one of the last things on your mind is how much a year's supply of toilet paper is going to cost. But the experts say no number is too miniscule that you shouldn't keep track of it, right down to the pen and paper your customer signs the dotted line on.
Absolutely every cost your business incurs when making a deal takes away from the bottom line, so here's how to make sure your sales figures reflect what you actually take home at the end of the day.
Building a budget
One of the most basic advantages of building a budget is to ensure that your business has the financial capacity to operate at the same level all year-round - through good times and bad. That said, it's also one of the hardest things to do when you're first starting off.
Alice Chan, senior vice president and COO at Mortgage Architects, has been helping brokers grow their businesses by keeping sound books for years.
"The very first thing I tell someone that comes to me for help is the analogy that building a budget for your business is the same as running your household budget - interestingly enough, a lot of people don't even have one," she laughs.
Ultimately, that is the major challenge with the mortgage brokering industry, she says. "So many people only look at the deposits in the bank book and see that as money to spend."
Chan simplifies the budget-building process by breaking expenses down into three steps so that rather than talking on a per-deal basis, brokers can calculate the actual profit made from each deal. "We show them how to translate those deals into dollars," she says.
Step one: Calculate what the variable costs are for each deal. Did you pay a referral fee or for a credit bureau, send a gift or take someone out for a meal? Save those receipts. This will give you the net amount of that particular deal.
Step two: What are your fixed costs? These are costs that you can count on incurring month in and month out. These include things like office supplies, promotional marketing material, rent on a storefront, the phones and Internet, your car lease, the assistant's salary and what you have to pay Revenue Canada each month.
Step three: Calculate your personal living expenses. As all brokers know, the business always gets paid first, but that doesn't mean you shouldn't also be thinking about the roof over your head.
Once you have all these costs calculated, you will know how much money you need to make per month in order to survive. Divide this figure by the net amount of each deal to know exactly how many deals you need to do each month to reach that
goal.
"That's the quickest and easiest way," says Chan. "It's basically cash-flow management."
Paul Bath is the president of CENTUM Hewmac Mortgage Centre in Newmarket, Ontario, a long way from where he first started in 1989. He credits his success to always having an accounting program to closely monitor his overhead, and blames the inability to do so for the demise of so many brokers.
"I can remember back in the '90s when I was the ugliest kid on the block," he says. "I had the worst office with the worst furniture and you had the guys with the nice storefronts who were leasing all their brand new furniture. Well they're not around anymore. You have to be lean and mean."
Creating a financial plan
If there is one phrase that keeps coming up with brokers in reference to planning, it's 'knee-jerk reaction', otherwise known as no planning at all.
"If you don't have a plan, then you're basically unlimited in what you're spending," says Mark Goode, an Orillia, Ontario-based lead planner with Mortgage Architects. "A lot of people don't plan properly," he says, adding that they don't find out if they made or lost money until the end of the year.
A financial plan basically involves taking your annual budget and projecting it for the next couple of years with certain goals in mind, he says.
"Let's say you want to buy a building, or want to save this much money in rent, or rent this printer for the next six years. Whereas a budget is usually strictly towards sales, a financial plan helps you reach specific goals like putting away $60,000 each year so you can buy the building in five."
The common problem with financial planning, though, is that a lot of people are afraid of it because they simply don't know how to do it.
"Financial planning is usually something that you do in your fourth or fifth year," says Peter Pasula, a Coquitlam, British Columbia-based mortgage expert with Dominion Lending Centres Pacific Inc. "I actually don't know anyone who starts off with a financial plan right away - they're too busy dealing with clients to deal with that stuff."
That said, Pasula does set goals and targets, and budgets for expenses on a monthly basis. "But obviously things come up and I'll blow that out, so then I have to backtrack for a couple months to get out of that," he says of his formula that has successfully worked for him over the past four years.
What Goode suggests for people who find themselves too busy to sit down and write up an Excel spreadsheet is to simply not do it themselves the first time.
"Get a professional, whether it's a Chartered General Accountant (CGA) or someone you look up to in the field to either come in once a month or give you a blank template to work from," he says.
For his business, Goode records the numbers and has a CGA come in once a month to review them with him. But when he first started, he simply gave an accountant the receipts and they did the recording. From there, he was able to project growth and set goals.
Bath agrees, stressing that "there is nothing more important than a good accounting package and a very good bookkeeper," he says. "Do not do it yourself. Our job is to bring in the money - the bookkeeper's job is to watch it."
Tracking progress
If you have taken the time to save your receipts, record them on a spreadsheet and calculate how much money each deal is putting in your pocket, then you've already done the hardest part. The next step is to maintain what you've established and track your progress so that you can see what you are gaining through this extra effort.
"One of our brokers who is very successful tracks his leads from the referral source on a spreadsheet on a weekly basis," says Chan. "He wants to establish how many leads he needs from that particular person. If he's not getting enough, then he knows right away that something is wrong. This is the heart of driving your business."
But perhaps spreadsheets aren't your thing. A book of graph paper and a pen will do just as well for the more traditional, "while the more sophisticated ones have an office manager and monthly meetings," says Chan. "Some even know when they get paid from the lenders and how much money is coming in on a weekly basis.They are the ones who have gone through the rigorous process."
Another surefire way to track progress is to ask your customers. Goode asks every client, even if it doesn't result in a deal, to fill out an online survey. "We want to know how they were referred to us. Every lead goes into our CRM program, inContact. Even if you're getting leads from somewhere and it's not generating any deals, it's still a good viable process to get leads to you."
As for Pasula, he doesn't let any customer off the phone without finding out where they got his number.
"How else would I know what's working?" he says.
Planning for the long term
Of course, even with all this planning, you can't account for some things, so your budget and plan should contain some sort of back-up within them.
"What I've been told by so many financial advisors is that you should always have three months of full expenses tucked away just in case things head south," says Bath. "I believe it should be six months. Start putting it away when you start doing business, even though it's hard at first. But if you make $1,000, put away $100. Don't just spend it."
He says this should be enough to cover everything - rent, phones, salaries, advertising and so on - so that when business slows down you can still operate, even if it is on a tighter budget.
"So many people get into this business because of the money in it, but they don't realize how hard it actually is," he says. "As long as you believe in it, you can do it - just as long as you watch your overhead."