In the bustling and highly competitive world of the mortgage industry, maintaining a keen eye on your branch's financial health is paramount.
A well-structured Profit and Loss statement (P&L) becomes your compass in this financial sea, providing clear and concise information about your brokerage's profitability overall while carrying the capability for detailed information about each branch.
The P&L statement comprises several components, each integral to understanding your business's financial status.
At its core, a P&L statement demonstrates the relationship between income and expenses, painting a vivid picture of your company's performance over a specified period. This document is integral to any mortgage brokerage's financial reporting, serving as a primary source for decision-making, forecasting, and strategic planning.
Therefore, understanding how to structure your P&L is crucial.
Mortgage brokers and loan officers generate income from diverse funding sources.
Wholesale banks like UWM, HomePoint, or Windsor to name a few pay out commissions earned on the loans that each loan officer originates. These commissions constitute a percentage of the loan amount.
Accurate tracking and recording of all sources of income are pivotal for your P&L, but maintaining that accuracy as your brokerage scales can prove to be a complex challenge. As the owner of a thriving brokerage, you want to deeply understand your profitability per branch, per loan officer, and even per loan.
When it comes to structuring your P&L, it's integral to build an income section that strikes a balance between granular and specific.
For example, giving each loan officer their own income line on your P&L is far too specific, while just having a general "Sales" line item doesn't give enough information.
If the brokerage owner continues to originate, it's best to use two income accounts: Direct Sales and Loan Officer Revenue.
Direct Sales help paint the picture of the revenue the brokerage owner brings into the business. In contrast, Loan Officer Revenue is the income the loan officers who work under the brokerage generate.
Ensuring accurate tracking of your income is not just about recording the final numbers. It's also about understanding where that income originates, how it fluctuates over time, and what factors might impact it in the future. Such insights can help shape strategies to boost revenue and can serve as a guidepost for potential expansion or investments.
Cost of Goods Sold (COGS)
In the mortgage industry, Cost of Goods Sold (COGS) might seem like a misnomer because there are no traditional "goods" being produced or sold. Many accounting departments leave out COGS completely.
That's an unfortunate mistake that leads to an incomplete picture.
COGS in this context refers to the direct costs associated with originating loans. These include expenses directly related to the loan origination, such as underwriting fees, credit report fees, appraisal costs, and any other direct costs that arise from creating and closing a mortgage loan.
It can also be incredibly helpful to include any commissions paid out to Loan Officers in your Cost of Goods Sold to more accurately understand your gross margin.
While COGS might vary significantly from loan to loan, keeping a meticulous record of these costs in your accounting system is crucial. It can help you identify patterns, such as recurrent high-cost items, and opportunities for cost negotiation and reduction.
In addition to the direct costs associated with mortgage origination, your brokerage will incur general operating expenses, often referred to as overhead expenses. These are the costs that keep your branch running, regardless of the number of loans you process.
General expenses encompass a wide array of costs.
These can include rent or mortgage for your office space, utilities, employee salaries, insurance, marketing and advertising costs, professional fees (for attorneys, accountants, etc.), office supplies, and any other costs that support your day-to-day business operations.
These expenses should be recorded carefully and methodically in your P&L statement.
The careful tracking of general expenses serves multiple purposes. It can help you manage cash flow, detect areas of potential savings, budget for the future, and provide valuable input for business decisions. For instance, if marketing costs are substantial but not yielding a commensurate increase in loan origination, you may need to revisit your marketing strategy.
Understanding and managing COGS and General Expenses are vital to maintaining a healthy bottom line in your brokerage operations.
Using Branch Classifications
Most modern accounting platforms come with the ability to classify transactions using a departmental system.
When it comes to your accounting system, bookkeepers are often focused on categorizing transactions to the corresponding expense category for compliance and business intelligence purposes.
You need to know what you're spending money on to run a successful business!
Department classifications are an extra layer that allows your accounting system to generate reports breaking out income and expenses on your P&L by department, or in the case of many mortgage brokers, by branch.
Leveraging the branch classifications on top of your existing expense classifications gives you the ability to generate a P&L by branch. You can see each branch's income, COGS, and expenses listed out in totality, giving you more insight into how your business is running.
The Profit & Loss Statement, when prepared meticulously and analyzed regularly, can serve as an essential barometer for your mortgage brokerage business's health. It's a clear indicator of your financial standing and provides critical insights that can guide decision-making and strategy.
Income, Cost of Goods Sold (COGS), and General Expenses are the critical components of your branch P&L statement. Understanding these categories and how they influence your bottom line can drastically impact your business's success and sustainability.
Income illuminates the effectiveness of your loan origination activities and shows the revenue streams of your business.
COGS provide insight into the direct costs involved in producing each loan, thus allowing for an understanding of gross profit and potential cost savings.
General Expenses offer a look into the cost of running your brokerage business, highlighting areas where operational efficiencies may be achieved.
Filtering all of this data by branch easily allows you to see the performance of each of your locations concisely.
In conclusion, establishing a well-structured P&L statement for your mortgage brokerage is not merely an exercise in bookkeeping. It's a strategic tool that can drive profitability, stimulate growth, and ensure the longevity of your business.
It's worth investing the time and resources to maintain and understand your P&L statement, as it can guide your business toward financial success.
And remember, while the structure and categories we have discussed are standard, every mortgage brokerage business is unique. Customizing your P&L statement to fit your specific needs and operations will provide the most accurate and valuable insights.
As a mortgage broker, your ability to understand and leverage these insights can be a game-changer in an industry where margins can be thin and competition fierce.