Your Profit Problem Probably Isn’t a Profit Problem
I had a conversation recently that got me thinking about the way agency owners measure success.
When business performance starts slipping, most people instinctively look at the profit and loss statement. They analyse revenue, review expenses, question staffing costs and look for ways to improve the bottom line.
It's a perfectly reasonable thing to do except that the problem is that profit is a lagging indicator.
By the time your profit margin changes, the events that caused it have often been occurring quietly in the background for months.
It's a bit like your health.
Imagine visiting your doctor after receiving some less-than-ideal blood test results. Your cholesterol is high, blood pressure is creeping up and you've gained a few kilos.
Those results matter, but they're not actually the problem. They're the symptom.
The real causes probably started much earlier. Poor food choices, lack of exercise, inadequate sleep, too much stress, or perhaps one too many Friday afternoon drinks that somehow turned into Saturday afternoon drinks as well.
The blood test simply reveals the outcome and nobody improves their health by staring harder at the pathology report!
They improve it by addressing the behaviours that created the result in the first place and rent rolls are no different. Think of profit is the blood test results and the health of the rent roll is everything that happened before it.
Yet many agencies spend enormous amounts of time focusing on the scoreboard and very little time examining what is driving the score.
When I review rent rolls, I rarely start by looking at profit. Instead, I look at the operational indicators that tell me what the future is likely to look like.
- Vacancy levels
- Arrears
- Owner retention
- Average management duration
- Lease renewal rates
- Days on market
- Maintenance backlogs
- Compliance completion
These are the leading indicators, the equivalent of diet, exercise and lifestyle habits.
A rent roll with rising vacancies, increasing arrears and declining owner retention may still be producing acceptable profit today. On the surface, everything appears fine.
But much like high cholesterol, the warning signs are already there but the financial consequences simply haven't arrived yet.
Conversely, some agencies become frustrated because their profit hasn't improved despite investing heavily in systems, people and process improvements.
What they're forgetting is that lagging indicators take time to catch up.
You don't go to the gym for two weeks and suddenly emerge with the physique of a professional athlete.
Likewise, a healthier rent roll doesn't immediately produce a healthier P&L. There is always a delay between the cause and the effect.
That's why the best agency owners I work with don't obsess over profit every day.
They focus on the things that create profit:
Monitor vacancies before they become lost managements.
Address arrears before they become owner complaints.
Stay on top of maintenance before it impacts retention.
Track owner churn before it starts affecting recurring revenue.
In other words, they manage the health of the rent roll.
The irony is that when you focus on the right leading indicators, the lagging indicators usually look after themselves.
Just as healthy habits tend to produce healthy blood test results, healthy rent rolls tend to produce healthy financial results.
So, the next time you're reviewing your P&L and wondering why profit isn't where you'd like it to be, ask yourself a different question.
Are you looking at the symptom?
Or are you looking at the cause?
Because in most rent rolls, profit isn't the problem. It's simply the diagnosis.
Where does your rent roll sit on this? Rent Roll Pulse benchmarks the 15 health metrics that drive valuation against Australian peers and shows you which ones to move first. Start your 14-day trial or join the Rent Roll Pulse community to talk it through with other principals.