As a financial advisor, you're probably quite adept at formulating investment plans and managing relationships, so your clients remain on a disciplined track for achieving their most important goals. But when it comes to achieving your firm's most important goals, you probably don't take the same approach to implementing an effective financial system or applying the same vigorous discipline to ensure that you and your business remain on track.

Advisors are often so busy working in their businesses that they believe they don't have time to work on their businesses. The large number of advisors who have high gross revenues but mediocre net incomes is evidence of the problem.

This problem can get even worse in tough economic times like the ones we are experiencing now. Advisors are working overtime to calm agitated clients and reposition portfolios for a changing future, and they don't have time to sit down and evaluate their own businesses. To make matters worse, flaws in business planning that may have been overlooked when revenue was rising are now visible to all as markets remain on a turbulent course.

It's time to get your financial house in order. A good financial system will provide you with important context around your raw financial data, letting you make informed decisions about every aspect of your business. It also will give you accountability to the numbers. Your chief financial officer—a key element of any good financial system—will be able to bring a disciplined approach to your finances, requiring you to face problems directly and encouraging you to pursue promising opportunities. To create an effective financial system, incorporate five key elements: forecasts, benchmarks, financial reporting, financial controls and exit analysis.

FINANCIAL FORECAST

Your financial forecast translates your business plan into a working financial model. The business plan must come first, of course. (See "Formal Wear" in the May issue for more.) But unless your plan is translated into financial information, you will have no way of determining if your business is on track, whether you've achieved major goals or how you should respond to new opportunities—all key issues that you'll face as the industry moves forward and emerges from the recent terrible market.

There are six important parts of a financial forecasting model:

* Revenue forecast. This provides the results for each revenue stream of the business.

* Budget for staffing and compensation. This looks at current compensation for existing staff, the compensation plan over the next two years for existing staff and any hiring you want to do over the next 24 months.

* Operating expenses. Your forecast should include a discrete budget for each area of spending (marketing, advertising, rent, insurance, etc.).

* Balance sheet. A key element is the working capital forecast, which indicates the level of internal funding available for ongoing operations.

* Cash flow statement. A cash flow statement is critical. If you start running low on cash, it will put pressure on the business that may affect hiring plans and your ability to meet client needs.

* Financial snapshots. They typically include a written summary, a profit/loss statement and key benchmarks (such as assets under management, total number of clients and how much the business is earning per professional staff).

BENCHMARKS

It's not enough to take a simplistic revenue assumption and say, "As long as our revenue is moving from X to Y to Z, we'll be fine." These kinds of assumptions often do not play out in the real world. Instead, your financial system should base its assumptions on the actual results you must have to achieve your goals. It should integrate the various parts of the business plan to understand what it really means and what it yields in profit. And it should provide benchmarks for revenue and expenses, all based on what you need to achieve.

To set revenue benchmarks, ask specific questions like, "In order to grow my revenue, what are the specific services I will offer? How will I expand my client base? How much revenue should I earn from each client? How many of each size client should I have? How quickly should I gain additional assets from these clients?"

To determine benchmarks for expenses, ask a different set of questions. They might include, "What staffing levels do I need to achieve my numbers? What number of new clients requires us to add another administrative staff person? For the expenses that accrue to each senior partner, how much in additional assets should each of them bring in each quarter?"