A Different Kind of Bubble; Commission Sales Reality Check
The first step in avoiding an alluring alternate reality is being aware of its existence.
This post will focus on four terms which are pre-defined as follows;
- 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 gross income generated for the selling of the actual product (a.k.a ‘gross sales’ or ‘business income’)
- Net Profit – the portion of the Gross Commission remaining after expenses, prior to personal taxation.
- Net Net – the actual dollars left in your hand for personal life expenses after all expenses, and taxation, are applied.
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 is an alluring alternate reality disconnected from receipt and review of things such as; formal financial statements, net profits, budgets, business expenses and perhaps most important of all the taxman (a.k.a. CRA).
Gross Production – Should one measure their business success by Gross Production? i.e. total mortgage volume funded, total value of Real Estate sold, total face value of insurance policies written? Arguably one should not. Although this gross figure is often an exciting one, and as such tends to feed the ‘AAA’ type personality types Ego, it is neither relevant nor visible on an actual income statement. It is also rarely relevant in any other area of the business success past a certain point of qualifying for such things as supplier status targets and ultimately industry top performer lists. (self-admission here; My Ego drives me to submit my otherwise personal Gross Production to CMP for their Annual Top75 list each year).
Gross Commission is, without doubt, the most vital volume metric as it is representative of the actual ‘Gross Sales’ of your business. Actual revenue generated is the starting point for success. Keeping a close eye on expenses will dictate the next important metric, Net Profit.
Net Profit, Close monitoring of detailed monthly income statements is vital. When flying blind (i.e. failing to review statements) there is significant danger of ones Ego quietly sacrificing Net Profit at the altar of Gross Production. 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 actually suffering a net loss on ten times the average agents production. Meanwhile, mid-pack, there are individuals quietly generating respectable gross production numbers, more importantly with stellar Net Profits.
Net Net is where 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. This formula should be top of mind.
All too many Mortgage Brokers come into the business with the perception that they will make 1% of whatever business they write. This is neither an accurate nor reasonable metric to embrace.
$500,000 Gross Production
$4,000.00 Gross Commission (Using .80 due to any number of variables, such as; Short term fixed product Non VB lender, Brokerage Split, Buydowns, etc.)
$3,000.00 Net Profit (following fixed monthly expenses, and direct transactional expenses)
$1800.00 Net Net – assuming a 40% tax bracket. (A prudent individual transfers $1200 of the $3000 net profit, into a separate account titled ‘income taxes’)
In this example, there follow a formula. One that can be applied to your own business.
GP x X (Gross compensation as a % from lender) = GC – EXP (Total Annual Expenses / by # of files processed) = NP x % tax rate from previous year = Net Net
or using the above data;
$500,000 x .80% = $4000 – ($24,000.00 gross annual expenses / 24 files = $1,000)) = $3,000 x 40% = $1,600.00
(***the use of 24K above is arbitrary and is a figure that would include office rent, cell phone, fuel, car exp, office supplies, staff, etc. Total annual Expenses***)
For every 500K in mortgage volume produced in the above example there is $1800 in the Brokers pocket to cover life, personal expenditures after all business expenses and taxes. (Not $5000 as all too many Brokers fool themselves into believing on payday.)
In this example the Broker is not making 1%, rather the individual is walking away with 0.36% (i.e. $500,000 x 0.36% = $1,800.00)
- 36% is the metric that matters.
This metric dictates whether one takes that trip to Maui, purchases that sweet new vehicle, or simply continues saving once the file closes.
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 a qualified independent bookkeeper (working in conjunction with and often handpicked by the Brokers Certified Accountant) preparing both an income statement and balance sheet for review of business achievements on a quarterly basis, if not a monthly basis. (Keep in mind that you are regularly instructing your own self-employed clients to ensure their taxes are filed by a Certified Accountant, you had best be working personally with one as well).
‘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 which many commissioned sales agents fail to pay attention to, at great peril to their business success and longevity.
Step One; Stop viewing your gross commission cheque as a personal paycheque, that is not what it is. (Truly anybody in a commission sales role would do well to think this way)
You are running a business (within a business perhaps), not simply working a ‘job’, think like an owner, speak like an owner, act like an owner.
Why does this psychological shift around commission cheques matter? It allows one to more easily create budgets 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 arguably 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.
Creating a psychological distance from the gross business revenues via Incorporating (read more here) eases the feeling of each business related expense representing a direct personal (and thus emotional) attack on your income. Many Expenses are the business owners best friend, used properly expenditures should be the fertilizer that feeds the seeds of new ideas for growth of the top line exponentially.
At the very least it would be wise, from day one in business, to open two completely separate accounts from current personal banking accounts. An independent chequing account for commissions, and a savings account with no debit card access for pending income taxes to accumulate within.
Budgeting & Expenses will form an entirely new upcoming post.
Thank you for your time