We have to admit that we enjoyed this holiday season with shameless abandonment. If you enjoyed it as much as we did, you're probably making the same New Year's resolution as we are-to shape up. In fact, now is the time to make the resolution to measure and monitor your waistline. We're not talking about fitting into your favorite pair of pants, but rather about making the resolution to measure and monitor your business waistline.

Through our work with advisory firms around the country, we have found that many practice owners focus their energy on working in their businesses instead of working on their businesses. You have spent time, effort and talent to build a business because you love your work and because you're good at it-not because you enjoy the process of building and managing a business.

Often advisors are talented in their field, but lack the time, drive or background to attack the process of business management. It is natural to focus on tasks that you enjoy and that best utilize your talents. As your firm's top executive, though, it is essential to step back from doing work in order to measure your firm's waistline periodically-it's financial and business performance-a process we call benchmarking.

Much the same way a dieter monitors his or her waistline, benchmarking helps you understand how your firm is performing, measures performance against your goals, provides ongoing measurements for assessment and allows you to adjust your business practices based on what you learn. It's like getting on the scale every quarter to see how you are doing, so that you can recognize which behaviors support your goals and which ones do not.



Reviewing your firm's financials may seem daunting, but with the right tools, you can have a simple but powerful way to benchmark your firm's performance. Knowledge is power, and knowledge of your firm's performance will provide you with the power to make informed decisions about your business.

Benchmarking is a business process that helps you make more informed business decisions by providing personalized analysis on your business and financial performance. It helps you to:

* Identify key financial and performance metrics. Specific measurements, or key performance metrics, are the performance indicators that gauge your business performance across particular areas.

* Measure and analyze performance metrics over time. Monitor key performance metrics on a quarterly basis to identify trends and direct your focus to areas in need of improvement.

* Adapt business practices to improve your performance. Armed with sound business intelligence, you have the information you need to adjust your business practices to help you build a more productive and more profitable advisory firm.

Think of the process in terms of your everyday interaction with clients. Before you can help a client, you need to obtain information from him or her. Similarly, your first step in benchmarking your firm is obtaining information. At the most basic level, your financial data should be used to measure performance.

One quick and easy tool that we employ with clients is the Economic Model. This can be a powerful resource in reviewing your firm's financial health, and its power is in its simplicity. As Einstein put it, "If you can't explain something simply, you don't know enough about it." The same applies to your practice's finances.



The Economic Model shows the relationship between a firm's revenue, expenses and profit. In this model, expenses and profit are described as a percentage of a firm's total revenue with expenses separated into direct and indirect expenses.

As shown in "Modeling Success," at right, direct expenses are those that directly relate to a firm's revenue growth. These are classified as professional labor expenses, including owner advisor and nonowner advisor compensation (all base salary, distributions, commissions, benefits and bonuses) and solicitor fees. Indirect expenses are further broken down into staffing expenses (all non-advisor compensation costs) and overhead expenses (all remaining office expenses).

By reporting revenue less direct and indirect expense, you will be able to assess your profitability more accurately, the true measure of a business waistline. As shown in the examples in the chart, revenue is allocated to direct expenses, indirect expenses and operating profit, with each defined as a percentage of total revenue.

Many advisors do not separate their advisor labor compensation (the pay for performing the advisor role) from their ownership profits (the reward for risk taken). The result is that advisors often "take what's left," masking an unprofitable business. As consultants, we will not say that advisors must have a profitable business (although it is highly recommended), as we recognize how you run your practice is a personal choice; however, we do believe that the choice should be an informed one. Knowing you are not profitable and choosing to be so for personal or professional reasons is, in our view, different than not knowing whether your business is profitable.

For advisors who take some or all of their wages in distributions instead of W-2 wages, building an Economic Model might seem difficult. However, there is a simple solution. Simply break down your total owner(s) income (all compensation and profit distributions) and allocate a fair wage to owner advisor compensation and the balance to profits.

For example, an advisor whose total owner income in 2010 was $350,000 taken entirely in distributions (no W-2 wages) might allocate $200,000 to owner compensation direct expenses to represent fair advisor compensation for his advisor role, and the remaining $150,000 to operating profits to show the firm's true profits. His total income remains the same, but internal reporting is now more accurate, supporting better business management.

Review your Economic Model against key benchmark-past Economic Models, industry benchmarks and specific goals. Doing so will allow you to make informed decisions about your business, particularly as it relates to financial management.



Taking benchmarking a step further, we recommend firm's measure performance against more than just basic financial data. Instead, firms should also identify, measure and monitor performance metrics such as revenue per client, clients per advisor and operating profit per employee. Combining financial performance measurement with this more granular level of benchmarking gives you the information you need to make better, more informed decisions that help align your business behavior with your goals.

One advisor, for example, had firm revenue of $600,000 and a goal of growing to $1 million. Hard as he worked, he just couldn't seem to generate the growth he wanted. In reviewing his benchmarking reports, he noticed that his revenue per client and assets under management per client were half what he wanted them to be, and that he spent the majority of his time on less-than-ideal clients. With this information, he realized that continuing to take on these clients was growing his top line incrementally, but was exponentially sapping his time, and with it his ability to grow. He called the next day to say he had referred a small prospect to another, younger advisor in his area, and he felt fantastic because rather than taking the easy money, he knew he needed to focus on taking clients that would help him achieve his goals.

This may seem too simple to be true, but the magic of benchmarking is its simplicity. Advisors are busy trying to run the business, service the clients, manage the staff, get their continuing education, maintain their industry knowledge, handle compliance and so on down the list.

The real power of benchmarking isn't the information it gives you (that changes over time). Rather, it's the power to keep you aware of what matters in your business and what indicators have an impact (positive or otherwise). This heightens your awareness of your circumstances and decisions, and keeps you keenly aware of what you need to do or change to achieve your goals.

Looking at your benchmarking reports regularly is no different than getting on the scale-it's a mirror that reflects the results of your behavior. You did X, you got Y. If you don't like Y, do something different. Do this consistently and you start to make more informed, objective decisions about how to run your business. Keep it up and soon enough your business actually gets better.

What you focus on is what you get more of. If you focus on "background noise," you get more of it, and if you focus on running a better business and growing that business, you get more of that too. Benchmarking is a business tool that drives the most important thing of all-behavior. When our clients benchmark their business and review those benchmarks quarterly, they are purposefully focused on managing their business better, and that's exactly what seems to happen. Managing your business, just as with your waistline, is easier when you have clear goals, committed behavior and the ability to monitor your progress against your goals.


Stephanie Bogan is the CEO of Quantuvis Consulting (Stephanie@quantuvis.com). Natalie Doss is the firm's research manager (Natalie@quantuvis.com). If you are interested in learning more about business benchmarking, visit www.quantuvis.com and click on the Benchmarking Available link.

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