As financial service professionals, you continually review your clients' financial performance. But how often do you stop to review your own firm's finances? Many small-practice owners focus their energy on working in their businesses instead of working on their businesses. As your firm's top executive, it's essential to step back periodically and take your firm's financial temperature--the measure of its health and well-being.

THE BIG PICTURE

The first step in a financial analysis is obtaining information. Your financial information can be divided into two basic categories: expenses and revenue. Most firms can obtain information on expenses and revenue through their accounting software. Accounting programs are inexpensive and make it easy to gather invaluable information on your firm's finances. This software is your first step toward regular financial checkups. Local consultants who can set up accounting software in a short amount of time are available, and they often offer bookkeeping services.

Once your financial information is easily accessible, you need to review it regularly. One quick and easy tool you can use to do this is the economic model. Here's how to create your own.

1. Generate a profit and loss or income and expenses statement for a recent period. If you don't have easy electronic access to financial information, use your last tax return. Be sure to account for information not reflected in your reports, such as commissions paid directly to you instead of your firm.

2. Determine gross revenue. Gross revenue is usually totaled for you in a profit and loss or income statement.

3. Determine the cost of your professional, direct-line selling staff. Include your own salary and owner distributions as well as the costs of all staff members who are primary revenue generators. Call this figure primary overhead.

4. Determine pretax profit at the end of the period.

5. Subtract pretax profit and primary overhead from gross revenue. Call this figure secondary overhead. Your primary and secondary overhead together give you the total cost of running your business.

6. To review: Gross Revenue = Primary Overhead + Secondary Overhead + Pretax Profit

7. Determine the percentage of gross revenue each category represents by dividing each figure (primary overhead, secondary overhead, pretax profit) by the gross revenue.

Why are these numbers important? As a business owner, you must include financial health goals as well as operational and growth goals. We recommend, as a starting point, that you use the goals of 40% primary overhead, 30% secondary overhead and 30% pretax profits. You can adjust these figures based on your firm's particular situation and needs.

DIVING INTO DATA

As you become comfortable with reviewing the health of your practice each quarter, you can look at your financial data in additional ways. You may decide to review revenue and expenses by revenue stream, or by revenue per producer. You may further subdivide your economic model, separating out staff salaries, nonsalary marketing costs or other relevant expenses. You can also divide revenues into commissions, trails and fees. Creating economic models for past years can give you a history of your performance, and show how expenses have changed relative to revenue.

Even the most basic economic model gives you a target to focus on in managing your company. I have found that having a goal increases your ability to achieve results immediately and dramatically. Maintaining an overview of your financial health and setting defined financial goals will help you focus on the big picture of your firm's growth and profitability.

A nationally renowned speaker and consultant, Stephanie Bogan founded Quantuvis Consulting in 1996, and has since worked with financial professionals to bring about meaningful change in their businesses. Email comments to stephanie@quantuvis.com.

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