The Most Important Metric of Your Brokerage and Why It Can Be Elusive

Posted by Peter Mueller, CEO of The Profit Centre on 2/4/18 3:26 PM

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 In order to run a profitable Real Estate Brokerage, one needs to know and understand the metrics involved in running one’s business. One of these metrics, which we consider to be the most important metric, is the GROSS PROFIT PER REALTOR (GPPR) metric.  This metric is critical to obtaining your Gross Profit per Realtor Objective (GPPRO).

GPPR

Gross profit can be defined as the profit a company makes after deducting the costs associated with providing services. In the broker’s case, it is the service from providing the framework from which realtors can facilitate their sales. Once this cost is deducted from the Gross Commissions, then the brokerage’s financial health is revealed by the proportion of money left over from revenues after paying out sales associates.

Gross Profit is the revenue a brokerage has available to pay for the day to day operations. On a typical income statement the Gross Commission Income generated is identified on the top line and the Cost of Sales is deducted (the money paid back to the realtors) to determine the Gross Profit. For many this number zeros out and the brokerage makes money from the desk fees, transaction fees and percentage fees.

The GPPR is achieved by clearly identifying the gross profit for the company divided by the average number of realtors in a 12 month period.

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The challenge that exists is what we at The Profit Centre call the pollution in the numbers. This occurs when blending Flow Through Income and Gross Income together in one general ledger (GL) item. 

Flow Through Income

Flow through income is the revenue that is collected on behalf of a 3rd party such as regional fees.

This can be better understood through an example:

Broker A wants to earn $12,000 in Gross Profit per year and blend in $3,000 in Flow Through Income a year. Typically the realtor is offered a 70%/30% split until the broker nets $15,000 or the realtor achieves $45,000 in Gross Commission Income.

When that realtor closes a sale the revenue gets posted into your back office software as percentage fee income.

The problem exists because the two revenue types are not separated out. A second problem exists for that realtor that does less than $45,000 in Gross Commission Income within the contract year therefore complicating matters even more.

If Gross Profit Per Realtor is the most important metric of a brokerage and that critical number is polluted than how is it possible to set clear targets and measure your results properly.

Taking the time to analyze and identify your revenue with clarity is the starting point for taking control of your business.

We know how to separate these 2 types of revenue in order to give you a clear and accurate picture of your financials.

At The Profit Centre, we can help clarify these issues in order for you to take control of your business.


Peter Mueller is the CEO and Founder of The Profit Centre, a powerful business evaluation software company. iBroker has proudly partnered with The Profit Centre to offer insight and tools Brokers need to run an efficient and profitable business. To learn more visit goibroker.com/profitcentre or call 1.833.8BROKER.

 

Topics: ROI, Office Management, profitability, gross profit