This is possibly the most difficult market I have experienced, which I suspect might last a while. I would welcome an insight into what I need to do to survive the rest of the year and come out fighting in 2009.
Many practitioners sensed a toughening market as early as Spring 2007 and carefully reviewed their business, subsequently adopting new strategies for increasing fees and training staff in techniques to make sales in conditions that were unknown territory.
Other companies were less swift in embracing change, assessing the market as reasonable through to the back end of last year, and pinning their hopes on the ‘new year, new market’ principle.
But for many, January simply compounded their challenges. Recent reports suggest that 4000 estate agency outlets may be forced to cease trading, with a number already closing. But many firms continue to thrive, due to careful financial planning and a change of business techniques, which they implemented as soon as they saw the market declining last year. Many agencies were then particularly interested in financial planning and budgeting.
It was interesting to note how many firms talked in terms of turnover rather than profit. But as the adage goes, ‘turnover is vanity, profit is sanity’. The cash-flow situation is a crucial area, thus I spent last year undertaking the simple exercise of assessing the money likely to hit clients’ bank accounts over the coming months and the anticipated costs for the same period. Stock review The first step is to carry out a detailed review of the quality and quantity of the ‘sold subject to contract’ stock. Staff are occasionally slow to remove a sale from their figures in the hope that it will eventually happen.
But for the purposes of this exercise, only bona fide transactions should be included. Calculate the fees, then add them to the fees of sales, which have exchanged but not yet been paid. A total ‘pot’ of forthcoming income thus appears. Typically, between 85% and 90% of this pot translates into bankings over the following three months, so you should be able to make reasonably accurate calculations about their income over the following quarter, based on this ratio.
A detailed assessment of forthcoming costs is also crucial. A list of likely outgoings can be prepared and a line-by-line forecast undertaken. In many cases, agents’ first guesstimates about future costs are considerably lower than actual costs, so an examination of previous expenditure, along with careful consideration of certain known costs, should be carried out.
As an aside, one benefit of a more difficult market is the natural reduction in costs, such as tax, including VAT, as well as staff commissions and bonuses. Once each expenditure line had been agreed, a total of the following period’s outgoings can be reached, which should then be subtracted from a previously agreed income forecast. Companies for whom we carried out this financial health check found varied results.
For a few, the figures were reasonably encouraging, although they showed that steps needed to be taken to build on the positive difference between income and expenditure. For others, the calculation made concerning reading, although the very fact that a future negative scenario had been identified allowed the firms in question to plan strategically to increase income and reduce costs before the situation became irreconcilable, and the company potentially insolvent.
To improve your cost income ratio, you should focus on how to add value to your service to vendors, to justify higher fees. Perhaps you could offer fixed fees rather than percentages, to protect income amounts in the event of properties selling at lower prices. You could also consider maximising other income streams, such as mortgage, conveyancing and survey referrals.
Staff training is also key, to help staff manage appropriate levels of income. An overhaul of your remuneration structure may be required, to reward income rather than simply unit sales. Enhanced levels of commission to valuers who achieve higher fee levels may also be considered. As for costs, you may want to create ‘must have’ and ‘nice to have’ lists, to help control your expenditure.
Marketing and advertising budgets should also be reviewed and costsaving exercises should be considered, such as assigning staff to erect and change boards instead of contractors.
The end of the month is a good time to review your cost income ratio, so what better time to start, than now?