Why Real Estate Agents Should Prepare Financial Statements
We can’t say it enough: When you’re a real estate agent, you don’t have a “job.” You’re running a one-person business. That’s part of what makes real estate such a flexible and rewarding career. And the most basic act of thinking like a business owner is to do your books. In other words, prepare basic financial statements by regularly adding up your income (revenue) and subtracting your expenses to see if you’re making a profit. That is ultimately what successful businesses do: make a profit after subtracting expenses from revenues.
If doing this seems like an unnatural act, we understand. We’ve been helping real estate agents treat themselves like business owners for quite a while now. Which is why we’ve prepared answers to what we suspect will be most of the questions that come to mind when considering our recommendation. (If we missed any, don’t hesitate to reach out and ask HOW.)
My tax return has all my income and expenses. Isn’t that enough?
Short answer: No. Longer answer: No—and here’s why. You’ll file this year’s taxes next year. So if you aren’t keeping accurate statements of all the expenses you need to write off now, you’ll likely miss out on the opportunity to maximize your deductions when you file next year.Your financial statements allow you to monitor your business performance in real time. And the best business owners use real-time data to make better decisions.
How often should I do my books?
Quarterly will work. Monthly is better. And weekly financial statements just make everything easier. What can we tell you, we’re finance geeks! But whatever cadence you eventually establish, if you haven’t tallied up your results this year, now is a great time to start. Once you get into a routine, it gets much easier. We promise.
How do I put together a financial statement?
First, gather all your bank and credit card statements. You can add up your income and expenses on paper with a calculator. Or you can use a spreadsheet. If you’re comfortable with technology, it’s generally much faster to use an accounting software which can automatically download transactions from your banks. Meaning, you are doing a lot less data entry.
You can also get professional help from a bookkeeper, accountant, or other financial service. (More on that shortly.)
Okay, I’ve done it. Now, what do I do with it?
First, look at your bottom line and figure out whether you’re on track to earn more than you did last year. If so, you should increase the amount you are paying to the government (federal, state, and local) for your estimated taxes. You don’t want to be hit by penalties. Moreover, you don’t want to think you have more money than you really do. The point of this exercise is to have a clear-eyed view of how your business is doing so you can make smart decisions.
Whoa, why is my bottom line so, um, thin?
Good question. And this is why you are doing all this now instead of next year! Time to look at all your expenses. There’s almost certainly something there you can cut. Maybe you don’t need to spend that much staging and photographing all your listings, especially if you aren’t earning enough commissions to make it worthwhile. Maybe you’re buying too many expensive meals, for clients or even yourself. It’s helpful to calculate how much of your income is going to major expense categories, like marketing and client entertaining. Then compare your spending to averages for other brokers in your area. This will help pinpoint areas where you can cut back.
I’m having a pretty good year! Why did I bother doing all this math?
Congratulations! Your one-person business is a success! That is, your bottom line is more than you need for your living expenses. And, once again, bottom line = income (a.k.a., revenue) minus [expenses and estimated taxes]. In such fortunate circumstances, time to think about rewarding Future You. Which is to say, it’s time to think about savings. And one of the best ways to really save is through retirement accounts that shelter your earnings from the IRS.
If you’ve already got a retirement plan, increase your contribution when your business is doing well. Not contributing to retirement? Now is the time to start. One of the biggest benefits of being a small business is that you have some very attractive options for retirement plans. A little professional advice will be helpful in choosing the right one for you.
I think I could use a little help with all this. Where can I turn?
So glad you asked! As it happens, we would like to tell you a little bit about Formations, we’re a financial management solution for self-employed professionals. We help you pay less in taxes and get access to high-quality benefits. As part of our service, we’ll regularly prepare your financial statements and give you more visibility into your business so you can make smarter financial decisions.