Money, Mortgages and Figures
As a business owner, company director, sole trader or entrepreneur, too many people don’t have a clear enough grasp on the numbers within their business or within their self-employment. This is potentially going to affect not only your business success but your mortgage success too.
Within this post, I hope to be able to give you a clearer understanding of the key metrics I use to track my business but equally what you need to declare to a mortgage lender.
Firstly starting with profits, net profit to be exact. This is after all expenses and all deductions have been made. Limited company directors will have net profit before or after tax.
When it comes to calculating your mortgage and how much you can borrow, the majority of high street lenders possibly aren’t going to want to use your profits and the minority of lenders who might consider it, are going to want to know what the profit has been over the last few years. There is potentially a chance that the lender will want to average these figure out over 2 years. In some instances, they will want to know what your latest years’ profit is and if we can provide this to them and put together a bit of a story around the numbers, and get the latest years’ net profit considered. We have a high success rate at Active Brokers for being able to do this.
Salary and Dividends
Equally, when you’re looking for a mortgage, knowing your salary, knowing your dividends that you’ve drawn out for the last couple of years, is really beneficial when it comes to your mortgage because the majority of high street lenders will want to use your salary and dividends as a means to calculate your affordability.
So knowing the salary, dividends, profits and equally having a projection for the coming year can really help you.
With the tax year ending in January or even April, having a good idea what your numbers could be, shows a deep understanding of your business and potentially shows the direction your business is potentially going in i.e. growing.
One thing to think about, relating more to the mortgage side of things, this is only relevant to those of you getting a joint mortgage, but knowing your partner’s full salary is vital. I recently had a client who came to us saying that his “wife’s salary was £20,000 a year” and she works for him in their HR department. However, he didn’t tell us that she only works 3 days a week, which meant that the pro-rata amount was considerably less than that. Ultimately, this had an impact on the overall amount they could borrow and we had to find them a new lender. Fortunately, they are now in their dream home! But giving us the wrong figures can affect the amount you can borrow. The only thing the mortgage lender is interested in is the amount of the actual salary they are receiving on their payslip as a gross figure every month.
Expenses and Cost of Sales
This leads to your expenses and in particular, cost of sales. This is looking at how much you’re spending on things like utilities, phone lines, stationary, etc. and you need to be looking to see if you could get these cheaper or get better deals elsewhere. Your job as a business owner is to know your numbers and where you’re spending these numbers.
Particularly in the cost of sales, we had a client whose turnover had remained the same, expenses were pretty much the same but their cost of sales had decreased significantly, which increased their profit margin for the latest year. That’s great because as previously mentioned, we can get the most previous year used. But be mindful that within your figure, there has to be a reason as to why there have been changes year on year when looking to get your mortgage.
If you can understand that in the last year, say, you bought a car or van for your business, or you’ve been investing in extra marketing, brought new furniture, moved premises, etc. this will affect the amount of profit that will come out at the end of the year. An underwriter and you as a business owner should be looking at where the differences are year on year. Where can you make savings? And where can you make improvements to your expenses? Because where you’re spending money, you’re going to want to see a return in respect of your turnover. For example, personally I have increased my marketing budget and new lead prospecting budget and I’m looking at that returning me an investment based on my turn over, so I am anticipating my turnover is going to be much higher this year, even though my expenses have increased.
I’ve been in business since 2006 and I lived off of spreadsheets, everything I did; income, expenses, sales tracking, it was all done through Excel spreadsheets. I still use them today, but I introduced an accounting cloud software, there’s a number of them online e.g. QuickBooks, zero. You can invoice through them, get monthly profit and losses, see your balance sheet, and you can see exactly what your business looks like on a daily/weekly/monthly basis, which is a lot more accurate than a spreadsheet. Investing in an online based cloud software could really be beneficial to your business and means you can easily access any numbers at ease.
Profit per Product
Something that is potentially overlooked a lot, not really by us, but by product based companies is looking at profit per product. My father, who has his own brand of torches, closely monitors the profit he earns per product. So he almost has the turnover, the expenses, and the profit, per individual torch, per home-care product, per gardening product and breaks it down. The advantage of doing this is knowing which product is doing best and selling more of the product that’s making you the most money or that has got more interest from the marketplace.
Within my mortgage business, one of the things that we do track is the drop-off rate. This isn’t massive but there are properties that are down valued, or the odd house that we have an issue with e.g. something pops up on the valuation report and sometimes we need to replace them with a new lender. Or, for example, you may have an insurance policy, that when they write to the doctors, to get a medical report, it turns out they can’t get that kind of insurance. So there is an element of cancellation or drop-off rate prior to the sale being made.
So it’s turnover, cancellation rate, sales. I tend to work bottom up e.g. how much profit I want to make, what turnover have I got to have to achieve that, what is the cancellation rate going to be and how many sales do I need?
So down the funnel, it might be 10,000 sales, 8,000 profit, allowing for a 20% cancellation (ours is nowhere near that high), then your expenses and profit thereafter. Understanding those sales targets, based on what your turnover and what your cancellation rate is going to be, is really beneficial because you can ultimately set sales targets and it’s good to know your targets. You can then break these down into weekly or daily targets, e.g. sales targets, depending on your type of business, these will help you grow your business.
I spoke to clients recently this year who are looking to buy next year, I worked out their profits, salary, and dividends they are going to need in order to get the mortgage they want and they’ve now gone back to their businesses doing and are implementing this strategy. Working out what their increase in sales needs to be to achieve the additional net profit or increase their salary – circumstances depending.
So in terms of our weekly targets, we have a number of leads that we need to get on a weekly basis, these are potential strategy calls coming in that I’ll need to be speaking to, getting the correct strategy in place or it could be people who are ready to buy their house now. Somebody who I spoke to and prepared a strategy for last year is now coming back to me to update their strategy and get the ball rolling. So we assess these strategy calls i.e. the number of prospects/number of leads coming into the business, we then look at the number of appointments or the number of fact-finds that we’ll do i.e. how much information we are taking on that individual client.
Once you know your sales target, you then need to think about the number of people you will need to speak to.
Depending on the type of business you are, you’ll want to know the number of leads you’re going to get, the number of appointments those leads is going to generate and from those appointments, you’re going to want to know how many sales you’re going to make. So it might be that you have to have 50 leads, 10 solid appointments and you might make 2 sales off of the back of that. That then enables you to work out, based on the sales target you have, based on the drop-off rate, based on the turnover, etc. what number of leads you need and what number of sales you need to be doing on a weekly basis to achieve said sales target.
It then comes back to monitoring where your leads are coming from, what source have you got them from? We get leads via Facebook, LinkedIn, Google, from emails, recommendations, networking events, etc. It pays to know which ones are best to spend your time on, which piece of content generated you the best return and helped your business and gave the most value to your clients.
Ultimately, a good piece of content is going to generate X number of leads, it might have been the Call To Action but it’s going to be valuable because people have seen it, shared it and liked it, etc. So having a real grasp on those numbers is what you really need to be doing and it actually needs to be one of your main focus points if you’ve got goals you want to achieve and particularly if you want to go and buy your dream home and grow your business to new heights.
3 Ways to Grow your Business
There are 3 ways in which you can grow your business; increase the number of clients you are going to get, increase the average transaction value i.e. the amount that each client spends, or you can potentially increase the frequency of which they are going to repurchase from you.
Increasing the number of clients goes back to what we were just talking about, increasing the number of leads you’re getting. Increasing the transaction value, for example, we could just arrange a mortgage for somebody but we’d be doing them a disservice if we didn’t talk to them about life insurance, critical illness cover and income protection and home insurance.
If they take our solicitors service, we look after the whole process from beginning to end and give them one point of contact for both the mortgage and the solicitor and we earn from providing that service. We’re not just providing a mortgage, we’re providing a complete package to make our clients’ life quicker, simpler and easier. This increases the clients’ transaction value. The majority of clients at the moment or in the last couple of years have been going for 2 or 3 year fixed rates so we will be contacting them every 2 or 3 years, again increasing the clients’ transaction value. If your client is buying your product or your service, if you can get them to buy from you more regularly, that is going to have an impact on your ability to grow. They do say that “80% of your revenue comes from 20% of your clients”.
A lot of people who I’ve been in association with or the companies I’ve worked for (prior to 2006), were so interested in getting new business through the door consistently, but actually, if you have a better relationship with the clients you’ve already got, they will keep coming back.
The highest cost I have in my business is trying to acquire new clients. If you set up a good strategy to look after your existing clients, provide them with more value, ask them what they want or what you can help them with, e.g. “we’ve done this great service for you on product/service A, what other product/services can we provide to make your life easier?” And that, in turn, is going to help you to increase the frequency at which those clients buy.
If you have any questions, feel free to put them below the post. Feel free to discuss and let me know what you think of this topic!