Real Estate Agency Finance - Queensland Australia - Assignment Example

Real Estate Agency Finance - Queensland Australia Student’s name Institutional affiliation PART A Assessment Questions BSBSBM406A: Manage Finances As the licensee of a real estate business please provide responses to the following questions: 1 In the operation of a real estate business what insurance coverage will be required and why? A number of insurance covers will be required in operating a real estate business. First, a building and contents cover will be required. This insurance cover helps in compensating the building and other property in case there is an accident or incident. Another insurance cover needed is the workers compensation insurance cover that caters for the compensation of workers in cases of accidents. Legal liability insurance cover is also required in order to cover the business in cases legal charges that might occur. Finally, a professional indemnity insurance cover is required. This insurance covers the professional people in the business against being held liable for damages arising from advice they give to the customers. 2 Your real estate business will be operating both a general account and a trust account. Outline the process for opening these accounts. Your answer must incorporate the requirements of opening a trust account as per the provisions of your appropriate Act. In order to open a trust account, the applicant must inform an approved deposit-taking institution in writing that he intends to open a trust account. He then obtains a license or proof that he is a licensed real state agent and presents to the institution. If the trust account belongs to a corporation, it shall bear the name of the corporation. Otherwise it shall bear the name of the applicant or firm of applicants. The applicant goes to an approved deposit-taking institution and fills an application form (in triplicate) the original copy is filed by the institution, one copy is sent to the Fair Trading and the third copy is for the applicant. All copies are signed by the institution (Sonnenberg and Sonnenberg, 2008). A general account is usually opened with a deposit taking institution that is approved. The applicant presents his wish to open a general account with an institution of wish and one that is approved. He fills application forms (Duplicate). The financial institution sign both forms, retains the original and the business retains the other copy. 3 In the review of an existing business what are the benefits of financial ratio analysis? Comment briefly on the purpose of two common ratios. There are various benefits of conducting a financial ratio analysis. First, financial ratio analysis helps to simplify the comprehension of the financial statements. This is because the ratios are capable of revealing the whole business condition. Secondly, financial ratio analysis helps managers to perform inter-business comparison with the aim of outlining weak and strong firms. Financial ratio analysis also helps business managers to plan and forecast. Finally, financial ratio analysis helps business managers to make proper decisions about investment. An example of a ratio is current ratio that is used to reveal the liquidity of the business. Another common ratio is quick ratio. This is also used to reveal the liquidity of the firm (Brigham & Houston, 2000). 4 Name the five main sources of finance? For debt finance please describe a common source of short term finance and long term finance? Why should the term of the finance be equated with the life of the asset? The five main sources of finance for a business include loan from a bank, personal savings, contribution from friends and relatives, retained profits and share capital from outside investors. Bank loans provide long term finance since the loan is usually payable after a long period of time, say 10 years. A bank overdraft is a short term source of finance and is mostly used for start up businesses. This is where the bank allows a business to withdraw some money from the bank after its account balance goes below zero to repay within a short period of time (Gale, 2011). The term of finance should be equated with the life of the asset. Assets will be able to pay back the financing so long as they are operational and one their lifetime is over, the assets will no longer pay back the financing (Gowthorpe, 2005). The term of financing should therefore be equated to the life of the assets. 5 In your first year of operation of APB Realty your income and expenditure is as follows: Income: $119,500 in sales commission, $200,300 in property management, $15,000 in let fees, incidental income derived is $2,080. Expenditure: Accountants fees: $4,800; Advertising and promotion: $70,000; Bank fees: $2,500; IT expenses: $29,500; Insurances: $5,000; Interest paid: $3,000; License fees: $1,300; Motor vehicle: $13,700; Printing, postage & stationery: $25,800; Rent on premises: $14,400; Salaries & wages: $102,000; Commissions $40,000, Subscriptions: $1,000; Superannuation: $9,180; Telephone: $15,000; Sundries: $5,000. Compile a financial report based on the income and expenditure for the year of operation. Income Sales commission $ 119,500 Property management $ 200,300 In let fees $ 15,000 Incidental income $ 2,080 Total income $ 336,880 expenses Accountant fees $ 4,800 Advertising and promotion $ 70,000 Bank fees $ 2,500 IT expense $ 29,500 Insurances $ 5,000 Interest paid $ 3,000 License fees $ 1,300 Motor vehicle $ 13,700 Printing, postage and stationery $ 25,800 Rent on premises $ 14,400 Salaries and wages $ 102,000 Commissions $ 40,000 Subscriptions $ 1,000 Superannuation $ 9,180 Telephone $ 15,000 Sundries $ 5,000 Total overheads $ 342,180 Net loss $ 5,300 6 Using the industry benchmarks provided to you in your course manual (see table below), compile a report on how the business compares with the accepted industry benchmarks. Note; expense categories used vary between all agencies; hence, the benchmarks will rarely be a perfect match for a specific agency. Income 100.0% Expenses Advertising and promotion 10.0% Referrals, conjunctions 1.0% Financial (interest, audit, bank charges) 2.5% License fees 0.5% Telephone and fax 4.5% Printing, postage and stationery 3.0% Rent of premises 5.0% Office expenses (incl. computer) 2.5% Staff on-costs (superannuation) 5.5% Producer salaries/commissions 35.0% Support staff 10.0% Agency vehicle expenses 2.0% Any other expenses (incl. insurance) 2.5% Total Overheads 84.0% Net profit (before tax) 16.0% Bench mark Real Value Real percentage Income 100.00% 336880 100 Expenses Advertising and promotion 10.00% 70000 20.78 Referrals, conjunctions 1.00% 6000 1.781 Financial (interest, audit, bank charges) 2.50% 5500 1.633 License fees 0.50% 1300 0.386 Telephone and fax 4.50% 15000 4.453 Printing, postage and stationery 3.00% 25800 7.659 Rent of premises 5.00% 14400 4.275 Office expenses (incl. computer) 2.50% 29500 8.757 Staff on-costs (superannuation) 5.50% 9180 2.725 Producer salaries/commissions 35.00% 142000 42.15 Support staff 10.00% 4800 1.425 Agency vehicle expenses 2.00% 13700 4.067 Any other expenses (incl. insurance) 2.50% 5000 1.484 Total Overheads 84.00% 342180 101.6 Net profit (before tax) 16.00% 5300 1.573 PART B Question 1. Using the above information, your task is to analyse the business opportunities available for Marywood Real Estate. Your analysis should specifically: The population in Marywood is growing at a high rate which might result it to doubling in the next 10 years. The growth and development of the area is one of the factors attracting many people to reside there. With this kind of growth, various opportunities will be created. To begin with, focusing on the 200 students who are to start residing in the two residential complexes, I am sure that these students will require some books, printing services and stationery which will not be provided in the residential complexes. In addition, the students will need to change their diet which will be provided in the residential complexes, this would create an opportunity for setting up a fast food dishes restaurant. The restaurant can grow very well if it will provide a variety of dishes as opposed to the food provided in the residential complexes. With such a big number of students, it is expected that there students will have different food tastes and preferences. Another business opportunity that is likely to arise is the establishment of a public means of transport. Beachside estate is said to have 300 blocks of land near the beach. Being near the beach, it implies that the blocks of land are prime properties which will easily attract many people. These people will need a means of transport to transport them in and out of the area. Since Marywood has just come up, majority of its residents will be forced to go to the city for their shopping which is only 60 minutes away. In addition, Marywood is situated between two major towns. A good method of public transport will help to transport the residents in and out of Marywood to these towns. The average commission in the sale of properties in Marywood is expected to vary depending on the demand. The commission on the sale of properties that are of high demand is expected to be lower than those that are of lower demand. The commission on the sale of residential house range from 2 to 3 percent. For instance, the average sale of a residential house of any size is $380,000. Since this type of residential unit is supposed to have a high demand, the commission for the salesmen should be 2%. While as a four bedroom home would cost on average $540,000, the commission on this type of residential unit should be 3 percent since it would be hard for the salesmen to get customers. Such a commission would help the salesmen to convince the buyers better. Question 2. Using the above information, now create a business plan. Use the business plan template provided under resources. The business plan must address the following: A business overview With $200,000 as my capital, I would start up a public transport company with 15 buses with each costing $10,000. The name of the business will be Marywood express and its aim would be to provide public means of transport for the people residing in Marywood area. The buses will therefore cost a total of $150,000 while the remaining $50,000 will be used to cover other expenses like paying for the insurance of the buses and setting up an office. A business structure Marywood area will be clustered into three regions. The criteria of clustering the regions will be based on the population size and the area size. Each of the three regions will be served by five buses which will be frequenting the regions at one hour intervals daily. The buses will have a driver and a conductor. The driver of each bus will be in charge of each bus and is supposed to report to the regional manager daily. The regional mangers will in turn report to the headquarters. Salaries and job descriptions The salaries of the employees will be fixed at $50 for the driver and $40 for the conductor daily. This salary will be inclusive of their daily expenditures like meals. On the other hand, the regional managers will have a daily salary of $70 considering that they have a bigger role. Market Analysis (use the information you have gathered for Question 1) Several business opportunities were mentioned above. However, Marywood express would be viewed favorable since Marywood is a new residential area implying that residents will require to travel much before it develops. The proximity of Marywood to two major towns and the city creates an opportunity for the residents to travel always. In addition, the population of Marywood has been forecasted to double in the next ten years. This implies that the number of people wishing to travel in and out of Marywood will grow as well. As a result, Marywood express is likely to grow in the new future thus calling for expansion of services. Competition Competition is likely to affect Marywood express since there are many people who are willing to join the open market. However, this will not discourage Marywood express to grow. Marywood express will have to gain its market share; this will only be realized by focusing on the customer demands by providing high quality products and services. In order to survive in the market, Marywood will ensure that there is good customer relationship with its customers and charge them fair prices. Products and services you will offer The business intends to provide public service transport to residents. Therefore the product in this case will be transport. It will involve picking up passengers at the specific bus terminals and charging them a fee for the service offered. An analysis of your strengths, weaknesses, opportunities and threats SWOT analysis is an important in any business that is intended to grow. The strength of Marywood express will be based on the fact that the existence of a well dedicated team of employees who will be willing to serve the customers to the best of their ability. There opportunity available in this business is the existence of a growing demand which would call for the expansion of the business. The growing population should thus provide the platform for the purchase of more buses. On the other hand, weakness exists in business due to prevailing circumstances. For instance, Marywood express is a business and thus it is expected to make profits. In as much as the business creates a good relationship with the customers, Marywood will be forced to set prices which the customers might complain. Threats likely to face the business are factors that create competition and may result to reduced profits. The highest threat in the business would be mismanagement; this may arise when the business grows big resulting to operations becoming difficult. Key objectives of the business Provision of efficient public means of public transport. Secondly, the business will aim at ensuring continued growth and development of the residence of its customers through corporate social responsibility. Establishment costs, including software and IT required The main costs in the business will be those related to setting up an office at the headquarters. The costs will include furnishing the office with equipment and computers. There will be need to have a software application to manage the business. The first year’s projected profit and loss Various challenges will be expected to have an impact to the business at the initial stages. Despite this, the business will be projected to make a profit of $40,000 during its first year of operation. However, this is expected to grow with time as the business establishes itself Question 3. As part of the establishment of Marywood Real Estate, you and your partner realise that you must use outside consultants, especially relating to the design and management of financial systems within the agency. (a) Please discuss at least three types of consultants you would use. Accountants: accountants would help to make sure that the business complies with various and relevant issues concerned with wages, salaries and superannuation. The business would also consult accountants on issues concerning banking structure, overtime and employment of people such as sales people and property management staff as well as bonuses and incentives for the staff. Auditors: the firm would consult auditors when opening a trust account for the business who then reports to the Fair Trading on various issues regarding the business operation. Environmental consultants: these people will help the business to comply with environmental regulations and perform activities that will help to protect the environment. (b) What role would these consultants play in the design, management and review of general agency and trust account operations? Auditors would be appointed in opening a trust account and would report to the Office of Fair trading on how the business is operating. For accountants, the business would require them in advising on the regulations, procedures and issues regarding opening, managing and operating a trust account. Finally, environmental consultants would be required in registering and licensing the business, which is a requirement the business needs to meet before opening a trust account. Question 4. Based on the case study information provided, and your cash flow analysis, what financial controls and reporting requirements will you put in place with regard to? The sales department I would use accounting records or use accounts received and paid. According to Gowthorpe (2005), this method helps to record all the financial transactions by keeping a well maintained paper file or electronic database. The property management department Financial monitoring and planning would an important method of financial control. Sonnenberg, J & Sonnenberg (2008) note that this method helps create internal reports which help to determine the progress by comparing what was in the budget and what has actually been used. Office administration and operations. In order to check financial performances in this department, I would internal controls. This method help to monitor the money and assets of a business to ensure that there is wise use of resources (Brigham & Houston, 2000). Question 5. Marywood Real Estate has now been operating for three months and there are several problems: The amount spent on advertising has been 50% more than originally projected. Printing, postage and stationery expenditure has been 45% more than projected. Wages and salaries expenditure has been 38% more than projected. The sales team has still not produced any income. (a) How do these outcomes impact on your projected income and expenditure? The projected income is expected to fall while the expenditure rises. The overall effect of this is that Marywood real Estate is likely to be making an average annual loss since the expenditure is higher than the income. (b) What solutions can you offer in each of the above areas? You must discuss at least three possible solutions for each area of concern. Your answer should include a discussion and review of variables such as income (commissions and fees) as well as expenditure. In order to avoid the above mentioned problem, there will be need to cut down on the expenditure and focus on increasing income. There is need to shift from the current advertisement method to a cheaper one. Alternatively, Marywood real estate should reduce the number of employees who are in the marketing team. On stationery, Marywood Estate should, enforce a mechanism to monitor the utilization of these goods so as to ensure wise usage. Records should be kept so that it can be easy to determine where the losses are arising from. In order to cut expenditure on the salaries, Marywood Real Estate should reduce its total number of employees to a figure that will lead to an overall profit instead of losses. On the sales team which has not bee successful, Marywood estate should recruit a team of competent personnel’s who can deliver positive results. Based on the first three months of operation, your task is to review the financial plans of the agency and adjust the projected cash flow analysis for the balance of the year. Your review should be based on your original cash flow analysis created for the business plan for Marywood Real Estate. Question 6. Congratulations! Marywood Real Estate has completed its first year of operation. Even though there were a few ‘hiccups’ the business is on track and you have achieved your financial targets. You are now preparing for a business meeting with your partner. (a) List the reports that you will require for the year of operation. Financial information Balance sheet Cash flow (b) How will you address the business plan for the second year of operation? Having established the business already, the business plan will be adjusted so that the budget will be cut down in order to reduce the expenditures. The business plan will also be prepared using high capital with the aim of maximizing returns. According to Sheffrin (2003) the business plan for the second year can help to reduces all risks towards making losses. Question 7. Congratulations! Marywood Real Estate has completed its first year of operation. Even though there were a few ‘hiccups’ the business is on track and you have achieved your financial targets. You are now preparing for a business meeting with your partner. (a)     List the reports that you will require for the year of operation. Cash flow statement Balance sheet Profit and loss statement (b)     How will you address the business plan for the second year of operation? Benchmarking would be a good idea to address the business plan for the second year of operation. This will involve first measuring the performance of the first year of operation and comparing it with other businesses. This will help the business to strategise on how to make sure that the business achieves the general performance in the industry. For instance, the business will be in a position to pinpoint its weak point and make efforts to improve them. If the expenses are beyond the limit, the business plan for the second year will involve trying to reduce them in the aim of improving profits. Question 8 You have now been operational for 13 months. When you reviewed the first year of operation of Marywood Real Estate you identified that Education Park provided encouraging sales and property management income for your business. Based on this preliminary evidence, you decide to investigate whether it might be worth opening a second agency at Education Park. From the information contained in your income and expenditure statements, and the costs of opening an agency contained in your original business plan, you must determine whether this is a viable proposition. In your answer, you must be able to justify your opinion and provide supporting evidence from your data prepared for Marywood Real Estate. Although Education Park provides a promising business for Marywood Real Estate, it is not worth to start a second agency at the park. This is because Education Park is not yet big enough to have its own agency. It would be better to operate with the agency already available since after all, the business is able to manage property at the Education Park. Money that would be used to open the agency at the education park with all the associated expenses such as salaries, rent for premises, stationery, licenses and bills among others will be more that the expenses that the business is experiencing opera References Brigham, E & Houston, J, (2000). Fundamentals of Financial Management. United Gale, M. (2011). Comparing Financial Systems. Cambridge: MIT Press. Gowthorpe, C, (2005). Business Accounting and Finance for Non-Specialists. Investors: A Step-By-Step Plan to Limit Your Taxes Legally. Ocala, Florida: Atlantic Publishing Group Inc. London: Thomson Learning. Sheffrin, S. (2003). Economics: Principles in action. Upper Saddle River: Pearson Prentice Hall. Sonnenberg, J & Sonnenberg, L, (2008). The Complete Tax Guide for Real Estate States of America: South-West Cengage Learning. Read More