The Effect Of Not Right-Sizing OPs When Market Changes

Apr 28, 2023

Right-Sizing After Refi-Mania

Let's look at the effect on Profitability when a branch does not adjust to lower production. We've included the video in this blog because it might be easier to follow along.

Let me first give a disclaimer if you haven’t taken our course for branch profitability the format might seem a little foreign to you, but I encourage you to follow along, and I think you will get my drift. Let me first outline month number one and show you our version of the 8 key performance indicators or what we refer to as KPI’s. The top BBP in month 1 is 252 basis points, or 2.52% average revenue for that month’s production. One of the keys to our system is we include the production numbers along with the P&L numbers. The other key to our system is it’s a much smaller number, which I found to be easier to track and compare when you take a quick look at your month. When we show only 8 numbers across the sheet we are able to look at a full years’ worth of data on one sheet of paper. In most cases we simplify over 2,900 entries down to just 96. As we’ve said in our training modules, most producing branch managers have less time today than ever before, therefore the need for simplification without sacrificing accuracy. Now Back to the numbers. The bottom Business Blood pressure is 71 Basis points. This column includes all expenses except for Lo Compensation. We convert to basis points for the same reasons as before. Let’s take a look at how we got to that number. We took almost 90 thousand dollars in expenses and divided it by the production which was 12. 3 million to get to the 71 basis point number. The CPI is 181, simple, 252 minus 71 = 181. The LO comp in basis points was 125 and the % of revenue was 49%. In this case study we’re not focusing on these 2 categories.

The Basis points in profit was 57. The volume was 12.6 Million. The profit was 72 thousand dollars. Now let's not get caught up in whether that’s a lot compared to what your used to or a little. I want to focus on the need to right-size this business immediately if you don’t see production increasing very soon.

Now let’s compare month 2 to month 1. As you can see the volume dropped from 12.6 million in month 1 to 6.3 million in month 2. Now in some case that’s an extreme…. except when rates rise and the refi’s dried up almost immediately, but it’s a perfect example for this case study. Let’s look across the rest of the KPI’s the top number in basis points didn’t change. If we were to review the P&L you would’ve seen that revenue in dollars would’ve been in half as well. The bottom Business blood pressure increased to 141. The standard rule of thumb is if your production drops by 50% your Bottom BBP will double let me show you what I mean. The total expenses without LO Comp in month 1 were roughly 90 thousand dollars. When we take 90 thousand dollars and divide it by 12. 6 million we get 71 basis points. But now let’s see when we divide the same number of expenses, the 90 thousand, by 6.3 million, (half the production),  the number jumps up to 141 basis points. Let’s focus on this conversation for a minute. When a branch manager looks at their P&L, the old way,  they will make a reference and say “ But Tom I didn’t add any more expenses why did my profit suffer so much No new people no new rent etc”. When the production report is separate from the P&L you cannot quite recognize it right away. In our system here is how it works. Step one convert to the 8 KPI’s. Step 2 analyze the data. Step 3 troubleshoot any issues you see in the data by referring back to the P&L. When you get dialed into our way of doing things, you will recognize immediately the issue and how you solve it because you learned this either in our academy or on the  live zoom sessions showing other examples. In the “norm” with most branches you look at the P&L first and have a puzzled look as to what just happened. It gets complicated, takes a ton of time, and zaps your energy to go recruit and make the branch better. Now back to the numbers in month 2. Top was 252…bottom jumped to 141 …the CPI dropped to 111. This means that you now have 111 basis points to pay LO’s 125. The math doesn’t work, because you now are losing 14 basis points, adding that up… you lost 8800 dollars. Now where does that loss come from? Either from you taking less Basis points for the loans you did personally or from retained earnings from previous good months, either way it’s real money down the drain. . If that production is not going to increase soon, you’re going to need to make some adjustments in the areas causing the drain.

In this example.. it might have been a little extreme by production dropping in half, but graphically it sure told a story. Typically, it doesn’t happen in a one month time frame, but its important to act when you see it happening. The other thing I want to point out is the timing. If you don’t review those P&L’s (or in our case the 8 KPI’s) quickly after the month is over…that leak will keep accumulating month after month until sometimes it’s too late. Here is my suggestion watch this video a few times so you can see cause and effect. Don’t be intimidated by the numbers, I’ve been doing this a while and it’s the reason why the created the program, thanks again. If you would like more information about our program, go to