Re broker-5e - 15

Unit 15: Evaluating the Business

 Financial Controls
• Introduction
o An accounting method is a set of rules used to
determine when and how income and expenses are
reported
o The cash method reports income when received and
expenses when paid.
o Many small businesses (with no inventory) use the cash
method because it is easier to keep cash method
records.
o The accrual method reports revenue when earned and
expenses when incurred.
o The purpose of an accrual method of accounting is to
match income and expenses in the correct year.

 Financial Controls (continued)
• Engaging an Accounting Firm
o Factors to Consider When Selecting an Accountant
 What services do you require?
 How much are you willing to pay?
 Who will be your direct contact?
 What is your accountant’s philosophy regarding tax
accounting?
• Selecting an Accounting System
o Questions to Ask Before Buying Accounting Software
 Can the software provide all of the bookkeeping functions
that your business requires?
 Can the software provide all of the financial statements that
your business requires?

• Selecting an Accounting System
o Questions to Ask Before Buying Accounting Software
 Can the software provide the tax reporting capabilities
that your business requires?
 Can the software provide the forecasting, budgeting, and
cash flow projection capabilities that your business
requires?
 Can the software calculate the commission splits that your
business uses?
 Is the software relatively easy to use?
 Is your accounting professional proficient in the software?
 Is the price within your projected budget?
 Does the program have a large installed user base?
 Is technical support available from other sources than
your CPA?

• Financial statements are prepared from accounting data
and used to analyze one’s business investment.
• They generally include an income statement, a balance
sheet, and a statement of cash flow.
• Understanding Financial Statements
o Income statement
 The income statement is a statement of all revenue and
expenses for a given period.
 The first line on any income statement is the total revenue or
sales.
 The direct costs or costs of goods sold expense is directly
related to the acquisition, creation, or distribution of its
products.
 The gross income is the amount of money left after subtracting
the direct costs. In a real estate business, it is called the
company dollar.
 The gross margin is a ratio used to calculate your company’s
profit margin after the direct costs of commissions and referral
fees have been subtracted.

o Income statement
 Operating expenses are the ordinary expenses that occur
while running a business. Operating expenses include rent,
office expense, supplies, administrative expenses,
depreciation, etc.
 Operating income is the money a company generates from
its own operations.
 Operating Margin = Operating Income ÷ Total Revenue
 Income Before Taxes is the amount of money the company
earned before paying federal and state income taxes.
 Income Tax Expense is the amount of federal and state
income taxes paid by the company.
 Net (profit) margin is a ratio used to measure the profitability
(as a percentage) of your company.
 Net Margin = Net Income (Profit) ÷ Total Revenue

o Balance Sheet
 The balance sheet is a statement of your financial position at a given
point in time, a snapshot of your business.
 Assets are things of value and can be classified as current or fixed assets.
 Current assets are assets that can be converted quickly to cash—assets
that have liquidity. They include cash, accounts receivable, marketable
securities, and prepaid expenses, such as insurance.
 Fixed assets are less liquid and include such things as real estate and
office equipment.
 Intangible assets include intellectual property rights, copyrights, and
goodwill.
 Liabilities are all monetary claims against the company.
 Liabilities are any monies owed to creditors. They are classified as
current liabilities (due within the next twelve months) or long-term debt
(due more than one year from the date of the statement.)
 Net worth is the amount of money that would be left over if the company
was liquidated—all the assets were sold and all the liabilities were paid.
 Net Worth = Assets – Liabilities
 The return on investment (ROI) measures the profitability of the business
based on the amount of money the owner has invested in the company
(owner’s equity). ROI = Net Income (Profit) ÷ Owner’s Equity

o Cash Flow Statement
 The cash flow statement is a summary of the sources and
the uses of cash.
 It demonstrates the company’s capability of carrying on
routine operations.
o Actual vs. Budget Income Statement
 A budget is a balance sheet that identifies estimated or
future receipts and expenditures.
 It is an estimate of the income and expenses for a period
of time.
 A budget should provide a standard of comparison for
your actual expenditures and for industry standards.

 Monitoring the Business
• Metrics are simply a standard of measurement.
o Metrics are a prescribed set of measurements that
quantify results.
o Metrics are a means to assess progress toward a goal.
o Key Performance Indicators (KPI) are metrics used to
measure the worth of the effort by a business or
individual in reaching goals.
• Real Estate Brokerage Metrics
o Key Performance Indicators in the Brokerage Business
 Market Share
• What is your company’s percentage share of your target
market? How does that compare to last year’s figures?

 Monitoring the Business (continued)
 Total Closed Transaction
• What is your total number of closed transactions? What is
your total Gross Closed Commission? What is your average
commission?
 Company Dollar
• What percentage of gross closed commissions is paid out
to your agents?
 Marketing Efforts
• Where did the leads come from? Which lead generation
technique is the most cost-effective?
 Lead Conversion Ratios
• Of the inquiries your company receives through various
marketing efforts, how many contacts does it take to
generate a closed transaction?

 Seller-Close & Buyer-Close Percentages
• What percentage of leads results in a listing or buyer
appointment?
• What percentage of appointments results in a listing or in buyer
representation agreements?
• What percentage of listing agreements result in a closed
transaction?
• What percentage of buyer representation agreements result in a
closed transaction?
 Listing Management
• What is the total number of listings taken, listings expired, and
listings cancelled?
• How does your company’s average sales price compare to the
MLS figure?
• What is your company’s percentage of List Price-to-Sale Price
compared to the MLS percentage?
• How does your average days on the market compare to the MLS
average?

• Information Management
o Information management is a terms that refers to all
the processes and systems within an organization that
support the creation and use of information.
o An information management system a type of system
that focuses on managing information in order to
provide efficiency and effectiveness of strategic
decision making.
o Types of Information Management Systems
 Web content management is a type of information
management system that provides website authoring,
collaboration, and administration tools to allow end users
to create and manage website content with relative ease
without in-depth knowledge of web programming
languages.

 Document management is a form of information
management that utilizes computer system and software to
store, manage, and track digital documents and images
originated through a non-digital format such as paper.
 Records management refers to the professional practice of
managing the records of an organization throughout the
business life cycle.
 Digital asset management is the business process that
involves organizing, storing, and retrieving rich media. Rich
media refers to photos, music, videos, animations, podcasts,
and other multimedia content.
 A learning management system is a type of a software
application that facilitates administering, documenting,
tracking, reporting, and delivery of digital educational
technology courses or training programs.

 A collaborative management system is a type of information
management system designed to help those involved in a
common task to achieve their goals.
 An enterprise management system is an information
management system designed to support a large scale
organization in making its operations more efficient.
o Common Issues When Developing Information Management
Systems
 Large number of various information management systems
rather than fewer systems or a single system to facilitate ease
of use
 Little integration or coordination between information
systems
 A number of systems that require constant maintenance
 Direct competition between information management
systems

o Common Issues When Developing Information
Management Systems
 Lack of a clear strategic direction for the overall
technology environment
 Poor quality of information, such as the lack of
consistency and duplicate or outdated information
 Little recognition and support of information management
by senior management
 Limited resources for deploying, managing, or improving
information systems
 Difficulties in changing working practices and processes
of staff
 Internal politics impacting on the ability to coordinate
activities enterprise-wide

o Developing Successful Information Management Systems
 Manage Complexity
 Adopt the Technology
 Deliver Tangible Benefits
 Prioritize Tangible Benefits
 Prioritize Business Needs
 Make Incremental Changes
 Strong Leadership
 Mitigate Risk
 Communicate Effectively
 Deliver a Painless User Experience

 Maximizing Income and Minimizing Expenses
• Tips for Minimizing Expenses
o Minimize the savings impact on employees
o Eliminate underperforming vendors
o Reduce Cost-to-Serve:
o Making last-minute changes to the original agreement
that could disrupt vendors’ schedule
o Contacting suppliers more often than their other
customers, requiring them to devote more time to
customer service
o Factors like this can affect a company’s cost-to-serve:
the total cost to that company’s vendors of doing
business with the company

 Maximizing Income and Minimizing Expenses
(continued)
• Tips for Maximizing Expenses
o Raise Prices
o Up-sell
o Bundle services
o Communicate often:
o Have a special event
o Say “No” to Bad Customers

 Exit Strategies
• An exit strategy is the method planned by a business
owner to sell or close the business.
• Steps in an Exit Strategy
o Be sure to hire professionals (legal counsel, CPA, and a
business broker or valuation expert) to advise you.
o Determine the value of your business as a going concern as
well as a liquidated value.
o Prepare a current inventory of your business assets. Include
photographs, serial numbers, and a brief description of the
condition of each item.
o Prepare your assets for sale by cleaning, painting, or
repairing the items you intend to sell.
o Do not overlook your intangible assets—an assignable lease,
business licenses, or permits. If these can be transferred or
assigned, they may have value.

 Exit Strategies (continued)
• Types of Exit Strategies
o Transfer Ownership
 Planning the succession of a business creates stability and
saves taxes.
 Estate tax is a tax on the transfer property at death.
 Federal gift tax may apply if you give someone money or
property during your life.
 Whoever is selected to run the family real estate brokerage
business must also be a licensed real estate broker.

 Exit Strategies (continued)
• Types of Exit Strategies
o Sell the Business
 Possible buyers include your agents or another brokerage in the area.
 Usually, a profitable business will sell for more than the value of its
liquidated assets.
 If a buyer can be found, this is a good exit strategy.
o Close the Business Liquidate the Assets
 If you have decided to get out of business and are not able to pass
your business on, merge, or sell it as a going concern, closing the
business and liquidating the assets could be the only exit strategy.
 If you close the business and liquidate the assets, you have to do
more than just lock the doors and walk away.
 You must pay any creditors and file appropriate tax forms.
 Liquidating your assets will give you less than if you sold the
business as a going concern.

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