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Managing the B Word

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

Helen Modly, 01/13/2011

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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.

Technology is a good example of this. We have a separate line item for each software subscription, (CRM, portfolio management, and so forth), and enter the expected renewal costs in the month that they come due. As part of your goal-setting, you should know whether or not you anticipate adding or replacing any of your technology during the year and, if so, you need to build in conversion costs and other nonrecurring expenses. The same goes for our E&O insurance renewal, property and casualty renewals, professional designations, and other expenses that recur at specific times during the year.

You will have other expenses that vary based on your goals for the year. For instance, continuing professional education is often a major expense for firms. Working with your staff, identify relevant upcoming meetings and conferences, and factor in the cost of out-of-town travel. Your budget should reflect the costs you are willing to incur, and it will allow you to provide an individual budget for each staff member. If you know that you will do some type of client event, estimate a dollar amount and a date, even if you have not yet decided what to do.

Salaries, both for existing and new staff, should be carefully reviewed and considered each year, hopefully before the year starts. This includes setting reasonable salaries for the owners of the firm, based on the projected gross income. You might build bonuses into the initial budget, just to see what the results look like. As part of your goal-setting, look at your employee benefits package and think about what changes might be desired. Once you decide what you want to do (add life and disability insurance, changing the type of retirement plan you offer, etc.) identify the costs and add them to the budget.

Manipulating the Bottom Line
Now that all the "have to" and "want to" items are included in your projections, take a hard look at them. All business owners should have a target for what percentage of your gross income needs to fall to the bottom line for your profit. Take note: you should be including a reasonable salary for yourself in your expenses before you calculate profit. If the expenses are looking a bit rich, maybe cut back on discretionary operating expenses, such as out-of-town conferences, new employee benefits, etc. You may also choose to defer a major expense, such as adding a staff person or changing software. This give and take has to be consistent with the revenue or growth goals you have set and you may choose to accept a lower profit short-term to achieve your long-term goals. Once you get into this process, it feels an awful lot like the financial modeling that planners do for clients as part of the financial planning process.

It Only Works if You Use It
You need to compare your actual results with your budget every month so that you can adjust as you go along. If your income is lagging, you need to watch your expenses very carefully. If a particular expense seems much higher than you expected, you need to investigate to see if you miscalculated or if you are being billed incorrectly. When our income dropped in 2008 because of the downturn in the market, we were able to react quickly by re-evaluating and cutting discretionary expenses based on our new revenue situation. As a result, we managed to have a successful year.

Taking the time to establish your goals, quantify them as to amount and timing in your budget and monitor your results each month, you will achieve success with that other "B" word--your business.

This article was cowritten by Sandra Atkins, CPA/PFS, a wealth advisor with Focus Wealth Management.

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