“Thinkin’ of a master plan

 ’Cuz ain’t nuthin’ but sweat inside my hand

 So I dig into my pocket, all my money is spent

 So I dig deeper but still comin’ up with lint.”

 —ERIK B. & RAKIM

It’s time, again, for a commission sales reality check.

Avoid living in the alternate reality of “The Gross Commission Bubble”.

Four key terms;

1. Gross Production—the gross ‘value’ of the transaction (i.e., a $500,000 mortgage, $500,000 residence, or $500,000 life insurance policy).
2. Gross Business Income—the gross commission per transaction, the real dollars, deposited to your business (not personal) account. Make no mistake, you are running a business – think like it and act like it.
3. Net Profit— What’s left in the account after expenses, yet prior to income tax.
4. Net-Net—the actual dollars left after accounting, in advance, for income tax.

Often Mortgage Brokers, Realtors and financial planners (among other business owners and commissioned sales–based individuals) find themselves living in a “Gross Commission Bubble.” An alternate reality unplugged from review of accountant-prepared financial statements, an understanding of net profits, preparation of budgets, or consideration for business expenses and, perhaps most important of all, ignoring CRA obligations.

The four points, detailed;

Gross Production—Should we measure success by gross production? IE ‘total mortgage volume funded, total value of real estate sold, or total face value of insurance policies written?

No, we should not.

Admittedly, this gross figure is often an exciting one. Being the biggest number in our business, it tends to feed “AAA” personality type’s (my) ego. For a few years anyway.

This metric is neither relevant nor visible on an income statement or bank account statement though. It’s rarely relevant to business success beyond qualifying for such things as supplier targets or industry top-performer lists.

Gross Commission is a vital metric, it represents gross sales, the actual revenue generated (cash in your account) and is thus the starting point for survival and success. Without question, this metric is key.

Cash is the oxygen of any business.

Although, it’s how much is left over when the smoke clears that really matters. Therefore, keeping a close eye on expenses, and corporate structure, will dictate the most important of all metrics: net profit.

Net Profit—Close monitoring of detailed monthly income statements is vital. When flying blind (IE failing to review statements regularly) there’s danger of one’s ego quietly sacrificing net profit at the altar of gross production.

Don’t chase volume for the sake of volume!

Don’t cut commission to turn volume.

Being busy for the sake of being busy is a slippery slope; there’re individuals in every industry generating significant Gross Production, who at month-end, or year-end, have no net-net.

An effective operator at any level can clear more on a net basis than an ineffective one running double, or even triple the volume of activity.

Net-Net is where your focus must be.

Understanding the relationship between gross production and net net is vital not only to the long-term survival of the business but also to the long-term survival of the individual (you). If your Gross is ~0.85 percent and your net-net is averaging 0.39 percent, then that formula should be top of mind. Know what you are truly taking home—before you get wild at the club.

Savings – A bonus term (often an unfamiliar one).

Your savings account (ideally a Hold Co account spun off your Op Co) should be where 10 percent of your gross commission flows instantly, no matter your income level.

Build for your future.

There’s no pension in this industry, and no notable value to your book of business. Invest strategically and create your own pension. Your world is real estate, you’ll see more clearly than most the immense financial security and wealth real estate can create.

You are a depreciating income-producing asset, know this.

And replace yourself as soon as possible with appreciating income-producing assets.

Real Estate.

Thank you

DW