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Create your own expense model and projections – how and why

Why is an expense model important?

Developing and following a budget is an important part of running a responsible business, whether you are a full-fledged company or an individual agent. An expense model is the tool for this. Using your expense model together with your revenue projections model will be invaluable for you as you grow your business and this combination should be used as a powerful self-management tool.

What is an expense projections model?

An expense model is basically a sophisticated budget. It identifies all of your costs – variable and fixed – and presents them in an easy to understand and edit format. Your expense model also provides an accurate forecast of profit/loss.

How do I build my model?

Your model begins with your top line revenue projections (the total money you bring in before any expenses). Ideally you will dynamically tie your projections in this report with the ones in your revenue model so that everything will auto update and you don’t have to worry about every having inconsistencies. This is a good idea in all cases where you have duplicate data.

Next, identify all of your costs of good sold (COGS). This is a unique perspective for real estate but I believe it is a good idea to think of your finances this way. For example, if you have an assistant agent (licensed of course to ensure compliance with this pay model) who you pay 20% of your total commission for helping with the transaction, this would be a cost of good sold. Any customer refunds (we give a 20% cash rebate back to our customers at CondoDomain.com) and agent referral payments are also COGS. When you have your final COGS inputted (in our example case, simply the 20% split with our assistant agent) do a running total to get you gross revenue (Total Revenue minus COGS).

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The third step is to identify all your expenses. Organize them by category. In our basic example we’ll use the following categories for expenses: advertising, conferences, gas/car, insurance, mls and other subscription fees, and tax accounting. Once you have inputted everything here, do another running total. This will give you’re your net sales projections – this is your profit/loss for the time period.

Model example:

Click to enlarge.

Changing your assumptions

Your final step in developing this model is a reality check. Are your expenses realistic? Are you making money? It’s important that you answer “yes” to both of these questions. If you are losing money, you have to scale back expenses to make sure you have a healthy business model. You can’t eliminate real costs, though. If your previous revenue model projects to generate 40 leads in a given quarter, you obviously need to invest some money in advertising to get this done.

How do I use my revenue and expense models together to manage my business?

In order to get the most out of your financial planning, you need to use your revenue and expense models together. I like to think of each row in these Excel models as a lever. As you pull one level, others will need to move too do to new pressures (either up or down depending on where in the model they are). If you need to increase revenue, and determine that you need more leads to feed your pipeline in order to make this happen, you have to edit the number of leads at the top of your revenue model AND increase your advertising spend on the expense model. If you are losing money in a quarter but cannot reasonably expect to increase revenue, you likely have to reduce some expenses: perhaps that conference in Las Vegas isn’t necessary after all. If your expenses are fairly fixed and your revenue can’t support them, you likely cannot afford the 20% COGS for your assistant.

When used together, these two models – even in their simplest iterations – give you most of the financial planning muscle you need. You need to continue to edit any future months as the environment changes and as you collect more data and can make better assumptions. When developed correctly, updated accurately and worked successfully, your models will give you clear visibility into your current and going-forward business. Your challenges and opportunities both will be easier to spot, and you will have an important tool to make sure you focus and invest in the correct areas.

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Written By

Hoyt David Morgan is an entrepreneur, angel investor and business strategy leader. He is an investor and/or adviser to a handful of exciting and high growth companies, and has been a part of several high-value exits. He is passionate about customer experience, smart business and helping innovative companies grow... and sailing.

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