• / Free eNewsletters & Magazine
  • / My Account

Related Content

  1. Videos
  2. Articles

Managing the B Word

Get your practice on firm financial footing by getting a good budget in place.

Helen Modly, 01/13/2011

Get practice-building tips and information from our team of experts delivered to your e-mail inbox every Thursday. Sign up for our free Practice Builder e-newsletter.

We all know how difficult it is to get our clients to prepare a budget, but, as a business owner, you have no choice in the matter. If you are going into the new year without a clear idea of how much you expect to earn in fees and commissions, what expenses you will incur and how much will be left over, then you are doing a disservice both to your business and yourself.

Budgeting, Goal Setting Go Hand in Hand
Almost every goal for your business has a financial component. Each year you need revenue goals, either related to the growth of assets under management or volume of sales. These goals must be established before you can begin your budget; they form the cornerstone of your plan. In addition, you should be able to identify what types of expenses you will incur while you're trying to achieve your goals.

To run a profitable business, it is imperative to quantify the costs of your goals and set everything out in an annual budget. You'll easily see whether or not the growth you project will cover the additional overhead expenses. Without this information, you run the risk of making the wrong financial decisions, particularly when it comes to hiring and expanding your practice.

For 2011, our firm identified that, in order to maintain growth, we need to add an additional staff member. We also need to focus on business development and marketing in order to improve our branding. Working through the budget process forces us to calculate what these activities will cost, identify a timeline for incurring the expenses, and most importantly, determine what we can afford. Some years we consciously leave some of the profit in our business to accomplish a major goal, such as moving into new space or converting to a new technology platform. We stress the word consciously because you should know well in advance what type of investment you wish to make in your firm and then have the ability to evaluate if it has paid off.

Calculate Your Income First
You can refer to the prior year's monthly cash flow to get a general idea of the amount and timing of your revenues. However, since the goal is to increase your income each year, you need to project 2011 income based on some reasonable growth estimate.

For fee-based advisors, your budgeting starts with an assessment of how much growth you expect in your assets under management throughout the year, which then becomes a firmwide goal. Once the amount is identified, you can estimate your income throughout the year, assuming your targets are met. If you also provide financial planning, then multiply the number of plans you anticipate preparing by your average fee per plan.

Use Actual 2010 Expenses
The accounting software that you use should allow the creation of a budget for 2011 based on the 2010 data. Copying the prior year's data is an easy way to get started. Many expenses can be based on the prior year, with an educated guesstimate as to any expected increases or decreases. Calculate the annual expense and divide it equally throughout the year, except in the case of expenses that occur at specific times.

©2017 Morningstar Advisor. All right reserved.