The following week I returned, with my notebook in hand, and waited anxiously while my nutritionist reviewed my food diary. "Let's see," she commented, "You seldom eat breakfast, seldom eat lunch, but dinner is a five-hour parade of food until you go to bed. Is that about right?" She'd summed it up correctly.
I thought she was going to scold me for my undisciplined and unhealthy eating habits, but instead we discussed what kinds of food I like and what I don't like. At the end of the session, she handed me a list of meals for me to eat for the next week. She explained why I need to eat several small meals instead of one ginormous meal at night. And she listed certain foods that I should only eat at night and others for the morning or evening. She patted my hand, led me to the door and offered, "You're gonna do great. We just need to work on a few areas, so you won't be hungry."
I am reminded of this because I was talking with an advisor a few weeks ago who wanted to hire new staff. "I'm not sure if I need one person or two," he told me. "I'm pretty sure I can keep two people busy for the next six months, but after that, I'm not sure. I've been taking on a lot of new clients recently, but I don't know if that will continue. Maybe I just need an intern for a few months."
After asking a series of questions, I determined that he did not have a marketing plan, did not know what it costs him in time and dollars to take on a new client, and believed that his profit is whatever is left each month after he pays the bills.
I asked, "If you bring on a new staff person, what capacity will that be in? Do you need another planner?"
"I hadn't thought much about that," he said, "I'm a solo guy; I just do what one guy and an assistant can do."
It doesn't matter how big your firm is, planning and tracking your performance can help you make decisions like the one facing my advisor friend. There are three major categories of financial ratios: profitability, staff productivity and client productivity. By tracking key information and performing a few ratios, you can clearly see what your profitability is, whether it's time to bring on another staff member, and whether your client relationships are profitable. For now, let's just look at profitability.
WHAT'S COMING IN?
Let's say my advisor friend's gross revenue is $500,000. That is all of his income from fees and/or commissions. Now, let's determine his direct labor, that is, the labor that is directly related to working on a professional basis with clients. This includes bringing on new clients as well as working as their advisor in some capacity. If you are a solo practitioner, this is your salary. If you have other advisors working with your firm, include their salaries as well. Don't include your assistants-they're overhead.
Your net revenue, then, is your gross revenue minus your direct costs. In this example, our solo practitioner pays himself $175,000. That's what he feels is a reasonable salary for doing the work he does. The $325,000 he has left is referred to as gross profit.
WHAT'S GOING OUT?
Now let's look at expenses. Overhead expenses include office rent, utilities, supplies, software and accounting fees, as well as administrative salaries. Overhead is anything you need to operate the business. In our example, that number is $275,000.
So, our gross profit, less overhead is $50,000. That $50,000 is operating profit or, in the case of our solo practitioner, his reward for ownership. Notice that his operating profit is 10% of his total revenue (operating profit/total revenue x 100).
WHERE YOU WANT TO BE