New Year, New Approach to Budgets
Considering the volatility and uncertainty of 2020, budgeting for the new year will require more than business as usual.
Budgeting season is typically mundane. Most businesses have their standard process for creating the next year's budget that has been that way for ages. But this year, we can all agree creating your company's budget has been anything but normal.
To start, with shelter-in-place orders varying across the country as COVID-19 hot spots flare up, 2021's budgeting process should include a thorough evaluation of how productive your brokerage business can work digitally if it is required.
Running a 20-person brokerage and acting as principal of a CRE software company (which has since been sold to Yardi), I had the opportunity to speak with numerous managing principals. These experiences gave me insight into conducting self-evaluations of business and operations. During your evaluation, every aspect of your business will likely be under review as the industry moves into an increasingly digital age. Although there seems to be overwhelming opportunities to digitally market listings, multiple options can help your CRE brokerage operate more productively and profitably on the back-office side.
Amid all this chaos, covering the basics is still important when creating a thorough budget for the upcoming year. Some managing brokers have shared that they are also focused on enhancing agent time, effectively managing corporate desk cost, and understanding their deal pipeline.
Having a clear picture of what sectors generate the most revenue allows brokerages to see where they should utilize resources. Should you be hiring land professionals? Investment brokers?
No matter how successful your brokerage business has been, generating budgets and strategic plans will always be an integral part of its continued success, especially during abnormal economic times. While there is no standard for every brokerage, based on my discussions with multiple managing brokers, a few commonalities arose as they created their budgets and strategic plans.
Preparing your budget includes doing your best to predict revenue, including understanding both booked but unreceived revenue, and potential pipeline opportunities. It also includes staying abreast of the evolving CRE technology available to help manage your CRE brokerage.
Part of the budgeting process can also include asking your top-producing agents what tools they believe will help them and the organization increase productivity and profitability. Agents can be helpful with understanding what can improve efficiency and their success rates, especially if they are early adopters of technology.
Checking in with the back office is also critical when it comes to creating a budget. Whether or not a shelter-in-place order is in the cards for 2021, it has been a year of difficulties and other factors that could lead to requiring businesses to work remotely in the near future. So it's imperative to ask yourself: Is your CRE brokerage business truly prepared to effectively work remotely?
Another major risk that is yet to be determined is any possible tax changes in the next 12 to 18 months. The new presidential administration could pursue legislation that would impact various sectors or all of commercial real estate. What if, for example, brokers lost the ability to write off specific business expenses? This issue is one to keep an eye on in 2021.
Reaching out to the back office is an essential element that can significantly enhance your brokerage's productivity and profitability. Enhancing the back-office processes can also improve transparency for your agents to have a thorough understanding of their earnings. Some of the important questions to consider as you engage your back office in understanding how to help enhance their productivity are:
- Does the current system effectively and in a timely fashion determine and distribute agent commissions?
- Do any tasks or activities in your process currently take too much of your time?
- Are any tools or resources available that would help you accomplish your job more effectively?
After reviewing these questions with your key back-office agents and marketing staff, discuss major topics with your entire tech staff as you move into this year's budget season. Since technology is constantly evolving, your use of various tech applications should also be constantly adjusting to your brokerage's needs.
It sounds like a given, but without communicating and discussing your budget and strategic plan with your entire team, you may be putting an obstacle between your goals and those of the various departments in your organization. Taking the time to communicate to your team why you're taking certain approaches will significantly increase a successful implementation of your company's 2021 budget and strategic plan.
As previously mentioned, one key element is the time and effort different individuals take, on a regular basis, to stay abreast of the new technologies in the CRE industry. In many cases, businesses might not even realize how much their outdated technology is hurting their bottom line. How can you know with certainty that it's time to upgrade your technology? With technology moving at such a rapid pace, your technology stack must be continuously evaluated. Just like a computer, if it's more than five years old, it is likely outdated and needs updating.
From my conversations, CRE executives seek out platforms with the ability to track historical transactions of the firms, built-in pipeline features, and rich reporting capabilities while integrating with other aspects of their businesses.
Managing brokers also shared that an essential way to gauge the health of your brokerage is by monitoring the firm's desk costs. Desk costs can include business expenses such as advertising, continuing education, licensing costs, office space, support personnel, and informational platforms.
Revenue generated by CRE brokers is more complicated than residential real estate because more of their revenue is generated through leasing commissions as opposed to sales. Determining and understanding desk cost, by sector, can become very time consuming when breaking down the percentage of revenue coming from office, industrial, retail, and land agents, as well as property management fees.
Knowing what sectors generate the most revenue allows brokerages to see where they should utilize resources. Should you be hiring land professionals? Investment brokers? Focusing on industrial because it's more profitable? Staying connected with industry trends helps managing brokers understand if their firm is already leaving money on the table in certain sectors, while also understanding if hiring more agents will increase profitability.
A commercial real estate-specific platform can help you manage sector revenue percentages, while refining how to apply this information to your budgeting process. An easy way to calculate this is simply dividing the total costs of your brokerage by the number of agents, but this approach only allows you to see an average, which can give an inaccurate view of your firm's desk cost in the long run. Technology can help automate calculations and individual desk costs to increase productivity for the brokerage.