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What separates great businesses from failures?

At the most basic level, it comes down to one thing: making good decisions. And at the heart of every good business decision is a thorough understanding of your business from top to bottom.

Which is why it’s so alarming that so many advisors operate without a firm grasp on their own business’ financial picture.

One of the most common pieces of advice given by advisors is “trust the data, not your gut,” and yet a large number of advisors operate more on gut than hard numbers when it comes to business decisions.

Not only is that a bit of a paradox, it’s also an incredibly risky way to run a business. Thankfully, it’s easily and entirely avoidable if time is set aside to get to know the data and numbers you already have.

4 Financial Numbers to Know

When we talk about getting a firm grip of your data, we’re really talking about understanding four primary numbers listed on every firms profit and loss statement:

  1. Income: The amount of revenue you bring into your business during a period.
  2. Cost of Labor: The amount of money you are spending on staff salaries and bonuses.
  3. Overhead expenses: All other expenses that does not include labor.
  4. Profit: What is left over after cost of labor and overhead expenses are taken out of income.

A Common Mistake

Many advisory firms make the mistake of spending most time analyzing income. In other words, how do we make more money?

However, one of the most important questions often goes unasked (and unanswered): How much can we spend?

How you make money is only one facet of a successful business. It’s success will be determined by how you spend the income to produce more income.

Getting your expenses in line with your strategic goals allows you to determine the best ways to expand your income and profits at the same time.

A Simple Formula for Reinvesting

There’s a direct line between your current business finances and successful business strategy. Taking the time to ground your strategy in the financial reality of your business is at the heart of setting wise business goals and making sound business decisions.

Understanding your finances not only tells you if your goals are reasonable, it also helps define success by highlighting what your return on investment needs to be to make your business strategy successful.

If all of this sounds familiar, it’s because it’s similar to the process you want clients to go through with you.

Creating a strategic financial plan for clients requires that you know their current situation — income flow and expense outflows. This helps you determine which goals are achievable, where investment needs to be made to achieve the goal and what they need to do to get there.

Getting your financial house organized is a simple and extremely effective way to set a business strategy that works for the firm. When you start with the data, you then can  be better equipped to make more sound business decisions.

Jarrod Upton, MBA, MS, CFP, is Chief Operations and Senior Consultant at Herbers & Company, an independent management consultancy for financial advisory firms. He can be reached at www.HerbersCo.com.