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Practice Management > Building Your Business

By the Numbers

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Last year, an advisor I know made a commitment to convert his insurance-oriented financial planning business to fee-based asset management, and he decided to do it by going “cold turkey.” He’d been prepared for his income to drop–a little, anyway. But in April of this year, he found that his income had dropped from $150,000 in 2000 to only $40,000 in 2001. Ouch!

I asked him why he hadn’t changed course during 2001 when he realized he was having such a bad year. He said, “I was generating a lot of activity, and everything seemed to be going well. I didn’t know how much money I actually made until my CPA prepared my taxes in April.”

Surprisingly, this advisor is not unique. Most advisors work hard, pay all their bills, and take whatever is left over as their personal income. But smart financial management is critical for success–and that means that you need to know where you are, where you want to be, what changes you need to make to get back on track.

Three Levels of Financial Record-Keeping

There are at least three different levels of financial record-keeping. Each one provides a different level of usefulness.

The first is the Shoebox Level, in which you only dig your records out of their shoebox in April when your accountant needs them for tax purposes. At this level, financial information is used to fulfill compliance requirements, and your motivation is simply to stay out of jail.

The second level is the Quicken or Quick Books level, in which financial information can be used to track your business results. In this model, you set up a chart of accounts and allocate your business transactions in accordance with generally accepted accounting principles. This is the level of record-keeping that would have alerted the advisor mentioned above that he should have changed course to keep his net income up.

A third level is the Excel spreadsheet level, in which financial information is used to plan, forecast, allocate resources, develop long-term strategy, and attract capital. This level of information will empower you to envision and create your ideal business.

Don’t Call It a Budget, Call It a “Profit Plan”

At my company, we don’t call a budget a budget, we call it a “profit plan.” These documents are actually the same thing, but one title is perceived as negative and the other as positive.

A profit plan is composed of four primary categories, your Gross Revenue, your Cost of Goods Sold, your General and Administrative Expenses, and your Net Income or Profit. You need to create a detailed month-by-month profit plan every year. Work with your accountant or bookkeeper to develop your company’s profit plan. Each month we print out our projected income statement and compare it to our actual income, and we track our results versus projections on a year-to-date basis.

Under Gross Revenue, you need to create a number of different accounts for each different type of income you earn. This allows you to quickly see where your money is coming from. Typical categories are fee-based revenue, commission-based revenue, split commissions, income from planning, and miscellaneous.

As a service business, you will probably not have many entries under Cost of Goods Sold. This could include management fees and other costs directly tied to generating revenue. Most accountants recommend that all marketing costs are listed under this category. If you subtract Cost of Goods Sold from your Gross Revenue, you’ll get Gross Profit. From your Gross Profit, you need to deduct all of your General and Administrative Costs like rent, employees, office supplies, phone bills, etc.

Me First!

It is critical to list your monthly income as a line item expense in your profit plan. You can put your income under the General and Administrative Expenses, or you can put it in its own separate category.

This strategy helped me to dramatically increase my income and lower my stress. When I first started, I paid my bills and took what was left over. This is a very unsophisticated mental model and can be extremely dangerous to your financial security. But real profits come only after you have paid all your expenses and yourself.

What should your salary be? Depending on where you are in your business, probably somewhere between $5,000 and $15,000 per month. Set it low enough that you have a high confidence that you will be able to pay yourself that amount each month. And if you achieve your profit plan goals, you can pay yourself a bonus at the end of the year, just like your employees.

Money as a Motivational Speaker

Let’s talk about splitting the profit. Everyone knows that people respond to incentives and that compensation drives performance. You are putting a plan into place to manage your business and to motivate your employees. But how do you decide how much is the right amount to share? And how do you structure a plan that works?

Start by looking at what big businesses do. There are three classes of stakeholders: the owners (yourself), the key executives (most likely you), and the employees. A simple way to share profits is simply to allocate one-third of the profit for yourself as an owner. This rewards you for the capital and time you have put into building your business. Another third can go to you as the key executive for managing the business and making the whole thing run. And the final third, the Employees’ Bonus Pool, can be split among your employees.

How do you allocate the Employees’ Bonus Pool fairly among your employees? The simplest way is to determine what percentage of your payroll is represented by each employee’s compensation. Then allocate the available bonus pool cash in the same percentages.

The actual bonuses in dollar amounts should range from 10% to 50% of each employee’s total annual non-bonus compensation. A significant amount will get their attention, and they will change their perspective and behavior. For instance, before we had a profit plan, my employees wanted to add staff, or at least temps, when things got busy. Once we created a Profit Plan, they knew that additional staff meant a smaller bonus payment, so they started figuring out ways to get things without spending money. Employees start thinking like stakeholders when you make them stakeholders.

Tracking Your Progress

So now you have your month-by-month Profit Plan, and you’ve got your employees motivated to earn a bonus. How do you pull it all together?

First, make sure everyone knows how to read financial statements. I have sent employees to workshops on business finance for non-financial managers. Then be sure to provide useful reports to keep your team focused on success.

We created a report form that we review at staff meetings weekly. It is a snapshot of my business’s key numbers on one easy-to-read page. In addition to tracking our cash carefully, we also look at how well we’re doing relative to our goal for the month. These meetings keep everyone focused on achieving our gross sales numbers so that we can achieve our net income numbers so that all of us can get a bonus.

Planning for Profit

Last year, I developed three Profit Plans for the various levels of support and office space I could afford at three different income levels. What I realized during this exercise was that no matter how much gross revenue I generated, I could earn a profit if I designed it into the financial model. Most of the expenses I have are variable, including my office lease, which, in the worst case, I could have gotten out of. If you have a clear idea of what you need to make and you pay yourself first, you can adjust your business expenses as you adapt to planned transitions or difficult economic conditions.

As an advisor, you’re advising clients on their finances, so it is critical that you manage your own largest asset–your company–intelligently. You also need a profitable business to attract competent employees. Without a plan and useful reports, you’re sitting in the dark. But with them, you can make informed decisions to achieve the business goals you have established.


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