It is time for a commission sales reality check. The first step in avoiding the alluring alternative reality of “gross commission” is being aware of its existence before you get sucked into it. Understanding the following four terms is going to be vital to your survival.
- Gross Production—the value of the item you are selling (i.e., a $500,000 mortgage, a $500,000 residence, a $500,000 life insurance policy).
- Gross Commission—the actual gross dollars that arrive in your business bank account (not your personal chequing account); this is income generated from the selling of the actual product (aka “gross sales” or “business income”).
- Net Profit—the portion of the Gross Commission remaining after expenses, yet prior to government income taxation and your own personal savings.
- Net–Net—the actual dollars left in your hand for personal life expenses after all expenses, taxation and savings are applied. These are the dollars you can take to the club to make it rain with. The net after tax dollars from your net after expense dollars.
Often Mortgage Brokers, Realtors and financial planners (among many other business owners and commissioned sales–based individuals) find themselves living in a “Gross Commission Bubble.” This alternative reality is disconnected from the receipt and the review of things like accountant-prepared financial statements, net profits, budgets, business expenses and, perhaps most important of all, the taxman (aka CRA). Actually, the most important of all is your personal savings account, the one in which the balance only ever rises… you do have one of those sorts of accounts, right?
Let’s discuss these four points further.
Gross Production—Should one measure business success by gross production, which is the total mortgage volume funded, total value of real estate sold and total face value of insurance policies written? Arguably, one should not.
Admittedly, this gross figure is often an exciting one. Being the big number, it tends to feed the “AAA” personality type’s ego. At least it did my own for a few years.
The fact is that this metric is neither relevant nor visible on an actual income statement. It is also rarely relevant in any other area of business success past a certain point of qualifying for such things as supplier status targets and ultimately industry top-performer lists.
Self-admission: my ego drove me to submit my annual gross production to CMP magazine each year in order to be ranked on the Annual Top 75 list. I also included it in the opening pages of the first book under the auspices of “author validation.”
I could suggest that I wanted clients to know that they are working with an experienced Broker, one of the top 75 in the country, but really it is just that I wanted that award to hang in the spot where a university degree should be. It was my consolation prize.
Gross Commission is a vital volume metric, as it is representative of the actual gross sales of your business. Actual revenue generated (cash in your account) is the starting point for success. Without question, this metric is key. Cash is the oxygen of any business.
Of course, it is not how much you make, but how much you have left over when the smoke clears that really matters. Therefore, keeping a close eye on expenses will dictate what is truly the most important of all metrics: net profit.
Net Profit—Close monitoring of detailed monthly income statements is vital. When flying blind (i.e., failing to review statements regularly) there is significant danger of one’s ego quietly sacrificing net profit at the altar of gross production.
Are you cutting your commission to turn volume? Are you continuing to spend on a marketing campaign that strokes your ego but is not driving revenues?
Being busy for the sake of being busy is a slippery slope; there are individuals in every industry generating significant Gross Production, who at month-end, or year-end, realize extremely slim net profits. On occasion they actually suffer a net loss on ten times the average agent’s production. Meanwhile, mid-pack, there are individuals quietly generating respectable gross production numbers, but more importantly with stellar Net Profits.
Net–Net is where your personal focus must always ultimately be. Understanding the mathematical 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 GP is averaging 0.85 percent and your NN 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, yo.”
I mentioned savings. In my opinion your savings account (ideally a Hold Co account spun off your Op Co) should be where 10 percent of your net profit flows, and the point of that account is to build for your future.
There is no pension in this industry, and there is no significant value to your book of business either. So, you need to invest strategically to create your own pension. Your world is real estate, and you will see more clearly than most the immense financial security and wealth real estate can create. This savings account should be exclusively for the purchase of an appreciating and income-producing asset—that is, rental properties.
The Hard Math
All too many Mortgage Brokers come into the business with the perception that they will earn a commission of 1 percent of whatever business they write. This is neither an accurate nor reasonable metric to embrace.
For example:
• $500,000 Gross Production.
• $4,000.00 Gross Commission (using .80 due to any number of variables, such as short-term fixed product, from a non VB lender, brokerage split, buydowns, etc.).
• $3,000.00 Net Profit (following fixed monthly expenses, and direct transactional expenses).
• $1500.00 Net–Net—assuming a 40 percent tax bracket. (A prudent individual transfers $1200 of the $3000 net profit, into a separate account titled “income taxes” and another $300.00, or 10 percent, to savings.)
In this example, there follows a formula that can be applied to your own business.
GP × X (Gross Compensation as a % from lender) = GC – Expenses (Total Annual Expenses / by # of files processed) = NP × % tax rate from previous year = Net Net
So, using the above data:
$500,000 × .80% = $4000 – ($24,000.00 gross annual expenses / 24 files = $1,000) = $3,000 × 50% = $1,500.00
(The 24K above is a figure that would include office rent, cell phone, fuel, car expenses, office supplies, staff, etc., leading to approximate total annual expenses.)
Did all the math hurt your head? Mine too—each time I had to proofread it. Keep in mind that the mental pain in navigating the equation above is what a client feels when navigating the mortgage process. Math is difficult for us all.
Let’s break it down to a nice easy formula—just as we do with clients and their mortgage math.
For every 500K in mortgage volume produced in the above example, there is $1,500 in the Broker’s pocket to cover life, personal expenditures after all business expenses, taxes and savings—not $5,000, as all too many Brokers fool themselves into believing.
In this example, the Broker is not making 1 percent; rather, the individual is walking away with 0.30 percent (i.e., $500,000 × 0.0030% = $1,500.00).
So, 0.30 percent is the metric that matters. And 0.30 percent is a long way from 1 percent. But the net net is always harsher to look at than the gross. In fact, what drives many businesses into the ground is the owner’s lack of desire or inability to face the fact that his or her net net is just not enough. The owner gets obsessed with the gross numbers.
And then the business owner, acting like the high roller they think they are, hits the clubs and “makes it rain” with their Gross Commission rather than their NN. A $3500.00 mistake using the 500K mortgage example above.
One of my pet peeves is the phrase “Our business made $X last night, week, month, year.” What you keep—that is what you make. Your gross sales number is not money you “made”; it is just money that moved through your business.
The net is what dictates whether you take that trip to Maui, purchase that sweet new ride or, more logically, buy a new investment property once the file closes.
You cannot do anything with the gross; the gross is not your money. It might be in your account for a little while, but you had best be earmarking what is owed to whom. And better still, you had best be moving it to separate accounts to keep it untouched.
Calculating your own personal metric is as simple as reviewing your past six months’ financial statements and applying the formula above.
You do have monthly financial statements for review?
Every sales agent would be well served by enlisting a qualified independent bookkeeper (working in conjunction with, and often handpicked by, your Certified Accountant) to prepare both an income statement and balance sheet for review of business activities on a quarterly, if not monthly, basis.
Keep in mind you are regularly instructing your own self-employed clients to ensure their taxes are filed by a Certified Accountant, so you had best be working personally with one as well.
You Are a Business
Your gross production matters only to your ego.
Your gross commission represents the gross sales of your mortgage business; it does not represent your gross personal paycheque.
This is a very important distinction that many commissioned sales agents fail to pay attention to, at great peril to their business success and longevity.
Reality cheque: Stop viewing your gross commission cheque as a personal paycheque—this is not what it is. (Truly, anybody in a commission sales role would do well to think this way.)
You are running a business, not simply working a “job.” Think like an owner, speak like an owner and act like an owner.
Why does this psychological shift around commission cheques matter? It allows one to more easily create a budget and accept expenses for what they are: necessary drivers of increased gross sales.
A key facilitator of this psychological shift is an option that should be embraced by every independent Mortgage Broker with long-term vision who has been in the business 731 days (in the Province of British Columbia).
Be Incorporated
If you qualify to incorporate, then incorporate today. Call or email your accountant right now and say it is time.
This is a deeply misunderstood gift. Seek out a wise, experienced and successful Broker, and ask them to give you a few minutes explaining why you should be incorporated. I can all but guarantee that such a Broker (wise & experienced) is themselves – Inc.
Aside from the vast tax structure benefits, the creation of a psychological distance from the gross business revenues via incorporating eases the feeling of each business-related expense representing a direct personal (and thus emotional) attack on your income.
Many expenses are the business owner’s best friend; used properly, expenditures should be the fertilizer that feeds the seeds of new ideas for growth of the top line and ultimately of the bottom line, the net net.
At the very least it would be wise, from day one in business, to open three accounts completely separate from current personal banking accounts:
• An independent chequing account for commission deposits.
• A savings account with no debit card access to accumulate pending income taxes.
• A personal saving account for your own personal savings.