CMOE forecasts: when will the money run out?

The CMOE (Current Monthly Operating Expense) number lets you know how many months into the future your overhead will be covered by the transactions in your current Pending file. The CMOE can serve to provide some peace of mind during these uncertain times. It allows you to know for some period of time into the future your company will be “all set” when it comes to paying the bills.

Before we begin...numbers from around the country

The CMOE numbers for offices around the country began to drop in the first 1/2 of March. The steepest declines thus far seems to be generally collated with the areas hardest hit with Covid cases. Here are the CMOE median numbers from a random selection of 500 offices analyzed last week.

• For companies with a single office, less than 100 agents: median CMOE 1.87
• For companies with a single office and more than 100 agents: median CMOE 2.65
• For companies with multiple offices and over 100 agents: median CMOE 1.32
• For companies with multiple offices and multiple companies: median CMOE 1.68

If your CMOE is 2.0, this means that your current pending file is sufficient to “pay the bills” for 2 months. If your CMOE is less than 1, then the files currently pending to close will not even pay 1 month’s overhead.

Why isn’t cost cutting increasing my CMOE numbers

The basic formula for CMOE is:

(Total Pending Income) / (Total Average Monthly Expenses) – (Total Average Income from Agent billing)

For accuracy, the Total Average Monthly Expenses is calculated in a “rolling 12” fashion. This means that all the expenses for the prior 12 months are totaled and then divided by 12. Most real estate companies have dramatically reduced overhead since March, but since CMOE averages are based on the prior 12 months, the recent reductions are not yet showing in CMOE averages.

Brokers may want to do some ad-hoc calculations of CMOE based on Average Overhead calculations from the last 3 months.

By Office and By Company

It can be instructive to examine CMOE at the office level as well as the company level. We are currently seeing wide swings from office to office within all companies reviewed. The CMOE numbers by office help highlight the physical locations with the highest per location overhead and it is useful to see the overhead next to the pending revenue.

For large operations with “Corporate Overhead”, one issue we see in our analysis is that the corporate office overhead is often not allocated to offices. This has no impact on overall company CMOE, but certainly make individual offices appear better performing than they really are.

Mathematics for CMOE

Here is the formula step-by-step for calculating CMOE:

Note: for AccountTECH clients, your CMOE forecast is in the Analysis report section. If you do not see it, please ask your system administrator to adjust your security settings.

Step 1: Calculate your total average expenses

Whether you are calculating by Company or by Office, run a Profit and Loss for the 12 months prior to this month. Add up all expenses and all other expenses then divide the total by 12. Do not include commission expenses or royalty fee expenses. We are just including operating expenses.

Step 2: Calculate your total Pending income

Sum the company dollar expected on all pending transactions scheduled to close in the future. Purposefully exclude transactions with expected closing dates in the past since these are likely “deal fell thru”.

Step 3: Calculate your average income from Agent Billing

Add all the income charged to Agents in the prior 12 months then divide the total by 12.

Note: including Agent billing is critical because some agents are on “100%” plans...but be careful here. Do not include items billed to Agents are are posted to expense accounts on your P&L. These items that were charged to expense accounts when the Agent bill is prepared have already reduced overhead. You don’t want to include them 2 times.

Step 4: Do the Math

(Total Pending Income) / (Total Average Monthly Expenses) – (Total Average Income from Agent billing)

Subtract the average income from Agent billing from the Total average monthly expenses. Divide Total pending income by this number. The result will tell you how long your current pending file will pay the bills.