Your profit-and-loss (P&L) statement is a roadmap for your mortgage business. It shows you the route to manage finances and grow. But if you can’t read this map, you could make poor choices. Choices that hurt profits.
This article explains how P&Ls work. It gives you tips to use your P&L. With these tips, you can make smart choices. Choices that help your mortgage business thrive.
Your P&L holds insights into your finances. With these insights, you can set your business on the road to success. You can steer your company where you want it to go. But first you need to learn to read your P&L roadmap. This article will teach you how.
What Is A Profit And Loss Statement?
A P&L statement shows your revenue, expenses, and net profit or loss over time. It provides a snapshot of your company’s financial status and is an important financial statement, along with the cash flow statement and balance sheet.
A P&L mortgage roadmap provides insight into revenue, expenses, and profitability over a specific period. This allows you to make decisions for the future.
For mortgage companies, common line items on a P&L include:
- Revenue: This includes income from mortgage loans, origination fees, and other services.
- Cost Of Services: This includes the costs directly associated with originating and closing loans.
- Operating Expenses: Overhead costs like salaries, marketing, rent, utilities, etc.
- Depreciation: This refers to the declining value of assets like equipment over time.
- Interest Expense: This refers to the cost of interest paid on debt.
- Taxes: These are the required payments to governments based on income and property.
- Net Profit: This is your revenue minus total expenses. This shows if your business made or lost money over the period.
A P&L shows your mortgage business’s financial health. Review it regularly to guide decisions.
Key Sections Of A Mortgage Company P&L
When reading your mortgage business’s P&L, start by looking at the major components:
- Revenue
This section shows all income your mortgage company generated over the period. Common revenue streams include:
- Interest Income: This is the interest portion of mortgage payments.
- Origination Fees: These are upfront fees charged to originate loans.
- Processing Fees: These are fees for processing mortgage applications.
- Underwriting Fees: These refer to charges paid for underwriting services on a mortgage loan.
- Application Fees: These refer to upfront fees collected when borrowers apply for a mortgage.
Closely analyze trends and fluctuations in monthly/quarterly revenue figures. Growth indicates your business is healthy and gaining market share. However, declines may reflect increased competition, seasonality, or macroeconomic factors affecting demand.
- Expenses
All costs required to operate your mortgage business will show up in the expenses section. These may include:
- Salaries and wages
- Commissions
- Marketing and advertising
- Technology and software costs
- Professional services like legal and accounting
- Licenses, dues, and subscriptions
- Office rent and utilities
- Insurance
- Loan origination costs
- Interest expense
- Depreciation and amortization
Monitor expense categories regularly and watch for any spikes that could signal inefficiencies. Expenses should align with mortgage revenue volume.
- Net Income
The bottom line of your P&L statement shows net income, calculated as total revenue minus total expenses. Positive net income means your business made a profit for the period—negative net income, on the other hand, is a net loss.
Track net income trends closely to ensure your mortgage company maintains profitability each month and quarter. Review periodically to see if you need to adjust your business model to improve the bottom line.
How To Use A P&L To Manage Your Mortgage Business
Regularly reviewing your mortgage company’s P&L uncovers insights you can use to make smart financial decisions and improve performance. Here are key ways to leverage your P&L:
- Evaluate Profitability: Analyze net income fluctuations and profit margin trends to see where your business is hitting (or missing) financial targets.
- Inform Pricing Strategies: Understand which products and services drive the most revenue and margins to optimize your fee structure.
- Control Costs: Identify expense categories that are growing disproportionately and implement spending cuts or process improvements.
- Assess Growth Opportunities: Determine which business lines have room to profitably expand based on revenue trajectory and costs.
- Benchmark Performance: Compare key P&L ratios like operating margin to competitors and industry benchmarks.
- Forecast: Use historical P&L data to forecast future revenue and expenses as you budget and plan.
- Value Your Company: Lenders will scrutinize your P&L history to assess your mortgage business’s worth if you seek financing or want to sell.
Use your P&L to make smart choices. It’s a powerful tool to grow your business.
P&L Best Practices
Follow these tips for preparing clean, accurate profit and loss statements that let you closely monitor your mortgage company’s finances:
- Generate P&Ls on a consistent schedule, like monthly or quarterly. Don’t just look at year-end.
- Use accounting software to automate the P&L process and ensure accuracy.
- Have an accountant review your P&L, at least annually.
- Compare each P&L to budgets and forecasts to identify variances.
- Look at 3-5 years of historical P&Ls to identify trends.
- Tie out revenue and expenses to other reports like bank statements.
- Calculate key ratios like gross margin monthly to measure progress.
- Analyze competitor P&Ls through industry reports to benchmark performance.
- Distribute P&Ls to key leaders and managers so everyone understands the financial drivers.
Follow these tips for a clear financial roadmap. It’ll guide your mortgage business to profitability.
Compare To Industry Benchmarks
Your mortgage company’s P&L ratios and trends should be periodically compared to industry benchmarks. Review profitability, revenue growth, expenses, and other key metrics against comparable lenders and industry averages. This allows you to gauge your performance versus competitors and determine if you are executing well or lagging in certain areas.
Use industry reports from sources like the Mortgage Bankers Association to benchmark:
- Profit margin
- Return on assets/equity
- Cost per loan originated
- Percentage of revenue from origination, servicing, etc.
- Revenue per employee
- Compensation as a percentage of revenue
If your metrics fall short of benchmarks, you can dig deeper into the gaps and develop initiatives to catch up to your peers. Meet or exceed industry averages to remain competitive.
Final Thoughts
Make P&L analysis a cornerstone of your financial management approach. Follow the best practices outlined above to ensure you have accurate, actionable P&L data at your fingertips to inform smart strategic decisions. With a strong understanding of your P&L mortgage roadmap, you can confidently steer your business toward continued success.
