Who’s Watching Your Bottom Line?
Besides being a Broker-in-Charge of a large real estate company, I am the President and CEO of FavoriteAgent.com (a national technology and agent services business). As such, I was set to meet with a good friend of mine who runs another technology and agent services company today and tomorrow. We were planning to work together on a major initiative and joint venture to be launched later this year.
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As it turns out, he had to call and cancel at the last minute because he had to attend to some serious issues in his company, due to the recent financial hard times we’ve all experienced. Believe me, I understood.
In the third quarter of 2008 we noticed a huge drop (19.5%) in revenues from our technology business (besides being a local real estate business, our company licenses our technology to over 16,000 real estate agents, worldwide, and many of those agents are having a hard time with the current state of the economy). Then again in the first quarter of 2009, we saw another drop of 12% in technology licensing revenues.
Now think about it: Most healthy companies in our industry operate on very thin profit margins (under 10%) and so needless to say, taking a 30% hit in revenues, almost overnight, would sink most businesses. And to be honest, had we not been paying close attention, it could have sunk ours. Fortunately, we’d done a number of things to position ourselves in such a way that we were able to weather the current economic storm, and were able to take prompt and decisive actions to keep afloat. And while every business is different, the underlying principles are always the same, regardless of the specifics of any business.
I thought it might be helpful to share four basic principles that enabled us to survive this the sharpest economic decline in my 30+ years of business, so here they are:
1. We Resist the Temptation to Acquire Debt. Shortly after launching our technology company in April of 2004, we were approached by two separate Venture Capital firms, each wanting to make us a huge loan to fund our growth. Most of the major companies in our space have grown using outside funding. Home Gain was recently rumored to be on their third round of venture capital, while HouseValues (now Market Leader: LEDR) eventually went public after several rounds of venture capital. There are many others that have grown by acquiring massive debt loads. Growing with debt allows a company the funding to grow very rapidly, and make a big splash in the industry. But, the problem with growing by acquiring debt is that in a downturn that debt service continues to march on, often putting a huge additional strain on profitability. By resisting the “get rich quick” method of growth by debt, we put ourselves in a very good place.
2. We Leverage Ourselves with Technology. The largest single expense in most companies is payroll. And most companies, frankly, have way too much payroll. I don’t mean they pay too much — I mean they hire too many people to do the jobs. Let me give you an example. I know a company in our industry that is very similar to ours. They license their lead capture technology to about 4,000 agents, and to support that operation they employ about 55 people. To support our 16,000 plus technology users and run our local real estate brokerage of 70 agents, we have a staff of 9 full-time and 1 part-time employees. Many of the functions and tasks are done by technology. Sure, there is a one-time cost for implementing a technology solution, but the ongoing costs are much lower than payroll, and technology never calls in sick, needs a raise, costs more for overtime, or under produces because of personal drama. Whenever possible, invest in a technology solution and not a person.
3. We Watch Our Numbers Closely. Today there is simply no excuse for not having immediate information. I remember when we all reconciled our bank accounts once a month, after receiving our bank statements in the mail. The process took half a day to tie all outstanding deposits and checks back to our reconciled bank balance. Today, using technology, information is immediate. Every morning, I reconcile five bank accounts and four merchant accounts online and have it all done in 15 minutes. Throughout the day, as we have commission check deposits to make or agent or vendor checks to write, we do them in our accounting software, and they are posted as they are done. I have instantaneous access to all my financial information, and with the click of a few keys, I can check any balance, run any report, or audit any expense. And what’s really cool is that I can do it from anywhere. When revenues dropped drastically in November, we knew it immediately and were able to take corrective action, reducing expenses before most of our competitors even realized there was a big problem.
4. We Act Decisively. As an employer for three decades, one of the toughest things I’ve ever had to do is to lay-off employees when they’re not needed. Even though we are a fairly good sized company, we have the feel and culture of a small family business, and our people are friends. That makes it tough when you have to make cutbacks. But sometimes, hard decisions have to be made. Recently I had to cut payroll by nearly $12,000 a month in order to keep the business in the black, and that meant letting two very good people go — people who were friends and who’d been with me for years. But, the alternative was to keep them on, and put the entire business in jeopardy, ultimately costing everyone their jobs. Had I not acted decisively, but rather labored over it for a few months, I would have depleted our operating capital and we would not have weathered the second big drop in February.
I could go on and on with examples, but I trust you get the idea. Whenever you are evaluating your own bottom line, whether as a broker, or an agent, think about these four simple principles. When you want to expand, can you do it without debt? Instead of hiring somebody to do a job, can you invest in technology to enable you or someone already on the payroll to do the job? Are you taking advantage of the information age we live in to have immediate access to critical financial and other data allowing you to have instant information? And finally, after having all the information and knowing what needs to be done, are you willing to make those hard decisions, whether that means letting someone go, or eliminating a comfortable expense?
Let’s face it: Part of owning a business (and never forget, you own a business) is surviving the tough times. Those hard times are actually great opportunities because they weed out the weaker competitors allowing the survivors to be poised for a greater market share as the business cycle turns, and it always turns. So, let’s be smart and let’s weather this storm and come back more profitable than ever before!
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