Money & Finance: Design a Financial Foundation for Your Business

January 1, 1996

It was a busy year: 14-hour days, a record number of closings, and every deal falling into place. You're sure your wallet's bulging. But do you know how much you shelled out in business expenses? Did you do a financial business plan at the beginning of the year?

Are your spirits sinking yet?

It's one of Saul Klein's jobs to pull out a pin and bust your bubble when you stroll in and exclaim, "It's been a great year--the biggest." Klein, who runs Saul Klein & Associates in San Diego, is well aware of the business planning issues facing real estate professionals because he's a certified financial planner and a real estate broker.

He ticks off several reasons why it's a bad idea to operate by the seat of your pants. Among them are potentially big tax bites, constant anxiety about money, and the likelihood of making poor investment choices.

You don't need to be a wizard to design your own plan. Here are some steps you can take to make 1996 a better financial year.

Determine your marketing plan: Where are you going to advertise; what promotional gadgets will you pass out; how many brochures will you print; what business bashes will you throw; how many mailings will you send to your farm area?

Decide what professional and cultural organizations you'll join this year (remember, sitting on museum boards and attending hospital benefits are great ways to network), and estimate the dues for such activities.

Will you be buying desktop publishing software to produce your marketing pieces?

Allocate expenses: How much money are you spending in areas other than marketing, and in what areas is it being allocated? Start by listing the categories in which you spend money. Jotting down two categories--MLS fees and miscellaneous--isn't sufficient. (For a sample breakdown, see "The Structural Skeleton of Your Plan," page 78.) A history of your spending will help you devise this year's business budget.

If you haven't the vaguest idea where your money goes, or if you're a rookie, try asking some of the successful people in your office how they allocate expenses.

Set goals: Once you've figured out all your annual expenses, estimate the number of closings you'll need to break even. "Everything over that number is gravy," says Linda Lubitz, a Miami-based certified financial planner with Woolf & Lubitz. "And it depends on every individual's desire for gravy as to what those goals beyond the break-even point are. Now you can decide what percentage of that figure to allocate for the various expense categories."

Klein suggests that such a process can serve as a motivational tool: "Write down the figure--how much you want for the year--and pin it on the bulletin board. It never ceases to amaze me that people usually motivate themselves to reach that goal. If you get in the habit of pinning up a number, you'll automatically strive for a higher one every year."

Establish an emergency fund: You've heard about this before, and you're probably saying, an emergency fund is for personal financial planning. What does it have to do with my business? Since you are your business, it's even more important to have a cash cushion.

Typically, the rule of thumb is to have three months of living expenses on hand. Lubitz suggests that real estate professionals operate by a different rule and have six months of fixed expenses--business and personal--in a money market account, especially if they're the family's main breadwinner. "You can control your expenses," she says, "but you can't necessarily control your income."

Even if you're a top producer and have a sound financial and marketing plan in place, you can still be sideswiped by a disaster. As an example, Lubitz cites the four weeks last summer when closings in Miami were dead in the water because of the hurricanes.

Dave Baker, a property manager and a certified financial planner with Baker & Associates in Spokane, Wash., says the cushion is especially critical for rookies: "People new to the business who've never lived on commission income are very optimistic, and many quickly go bankrupt because they're undercapitalized. They have a misconception that they're going to start generating income from day one."

Track your money: Another component in a successful business plan is automatic tracking of your expenses. Both Lubitz and Klein recommend Quicken or other software that allows you to set up your own categories. Klein points out that most people spend money only a few times per day. "It takes two minutes a day to log those expenditures on your computer," argues Klein. And those minutes could spell a big payback.

Such a program can help you tell how effective your advertising is, for example. Maybe you've sunk loads of money into an ad campaign, but your business is still sputtering. "If there's no revenue coming in, you're spending money in the wrong places," Klein says. "Tracking expenses may tell you to shift to a different marketing plan."

Tracking expenses will also make your tax filing less arduous. "If you don't have a financial plan, you may not be able to take advantage of potential tax savings," Lubitz points out. For instance, you may not know what tax bracket you're in, and you won't know whether leasing or buying a car is better for you. And Klein warns, "You can have the greatest year of your life but end up owing the government so much money that it takes you four years to recover."

After adding up all your anticipated spending, income, savings, and investments for this year and then looking at your 1995 taxes, you'll have a good estimate of what you should send to the IRS each quarter this year.

Execute a smart divorce: If you're funneling money between your business and personal accounts, stop. "If you're audited, you need a clear trail of where money came in and how it was spent. Once you start commingling funds and pay business expenses out of your personal account, it's hard to go back and account for your transactions," says Lubitz. Moreover, she points out, "If you don't set up segregated bank accounts, it's not really a business but part of your personal life. You need to do things that businesspeople do to be successful."

Once you have your business plan in place, you're in a better position to start investing your earnings wisely and get yourself on the path to financial security. "Most people spend more time planning their vacations than they do on their financial future," observes Lubitz. "Setting goals early and integrating a systematic savings component are the only way most will become wealthy. Investing should be disciplined, methodical, and consistent. Financial planning is a long-term proposition."

The Structural Skeleton of Your Plan

Here's a sample of categories that should give you a start in tracking and projecting your expenses.

  • Association fees
  • Business travel
  • Car: insurance, maintenance, payments
  • Computer hardware and software
  • Equipment
  • Insurance: auto, disability, health, life
  • MLS fees
  • Postage
  • Printing costs: business cards, stationery
  • Promotion: brochures, signs, open houses, advertisements
  • Retirement
  • Salaries: personal assistants, secretaries
  • Telephones: cellular phones, office phones, pagers, long-distance charges

Elyse Umlauf-Garneau is a Chicago-based freelance writer and former senior editor with REALTOR® Magazine.

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