Do your business planning now before it gets real busy.
Whew! The last two weeks of December are usually ugly for financial advisors. Not only do we procrastinate getting our own holiday chores done, but our clients will almost always throw a few last minute curve balls that completely destroy any illusion of time management.
The one chore that is usually the first to go out the window is the business planning session we have been promising to hold with our selves or our partners. Now that last year is over, it's time to get to it before it gets busy. January will quickly become February, and it will be time to prepare for taxes before you know it.
Schedule a Day with Yourself
Set aside a day on your calendar in the next two weeks and leave the office if you must to give yourself the time and space to develop a meaningful business plan for 2007. If you absolutely feel you can't devote an entire working day for your own planning, your priorities probably need some work. If your only free time is evenings or weekends, then that is when you will have to do your planning. If you are already working evenings and weekends, then a planning session is even more critical for to regain control over your own business.
Collecting Your Data--Slice and Dice
Pull together the data you will need to review and analyze. You are basically going to look at clients, revenues, services and expenses.
All business owners must be familiar with the cash flows of their business. Hopefully, you run your business with one of the popular accounting software programs such as Quicken or Quickbooks. If not, then 2007 should be the year that you begin to experience the benefits these types of programs can provide to a business owner. These programs are relatively easy to learn, considering you are a financial advisor and should understand the basics of identifying sources and uses of funds. In lieu of an accounting program, you may be using customized spreadsheets to track your business, but I heartily suggest you convert to the software.
Identify All Sources of Revenue
Go through your records for 2006 and identify all revenue sources you have received or expect to receive.
This is where you will see the edge to using accounting software. You should be able to identify all revenue by client, by product sold or service rendered, and by month billed/received. If you are a sole proprietor, review your tax return for 2005 to identify the payors for all your 1099 and W-2 income for that year. Did you add any new sources of revenue in 2006? Are there any sources that didn't pay you last year? If you received commissions, you need to be able to separate new first-year commissions from trailing renewal commissions to accurately evaluate the year's activity. The better your records, the better you will be able to slice and dice your data so that you can focus on these questions:
Review Your Expenses
This is the activity that will determine if you are really running a profitable business or just generating extra cash flow for the family. Ideally, you have been tracking expenses by various categories in your accounting software. If not, then gather the records to determine your expenses for the year. If you don't have any organization to these records, use the Schedule C-Profit or loss from a business as your guide. Use the main categories from the form and add or expand any for items you want to track more closely. This will also aid in the preparation of your tax return since your categories will already match the tax form.
Create Your Budget
As you identify your business expenses for 2006, develop your budget for 2007 by asking which expenses are likely to increase, decrease or stay the same. What new expenses do you anticipate?
Don't make the common mistake of not establishing a salary or fixed draw for yourself in your budget. This should be your first line item on the budget-owner's salary or draw. Think of your salary as your cost of goods sold, and it should be separate from any other expense items. Too many advisors believe they are profitable because their revenue exceeds their expenses. Maybe, but it is not profit until you have subtracted your cost of goods sold (your salary) as well as your normal business expenses from your gross revenue.
Mine Your Data to Set Next Year's Goals
Two of the most useful industry benchmarks for understanding your practice are annual revenue per client and annual profit per client. Knowing these will help you determine how many new clients you will need to meet your profit goals for the coming year. Does the number of new clients needed seem reasonable based on prior experience? Do you need to increase the profitability per client as well in order to meet your goals? Are there any products you sell or services you provide that seem underutilized in your client base, or that don't generate sufficient profit to keep offering them?
By analyzing your revenue and profit per product or service will help you evaluate which activities are most important to your business. Are you spending too much time creating plans for the financial planning fees received? Consider doing fewer plans for a higher fee. How many planning clients have been converted into asset management clients? Too few might mean that you need to be doing a different type of planning for a different client. Knowing where your revenue really comes from and being able to identify your most profitable activities is critical if you want to increase them.
If you are also paid for assets under management, you will want to know your average account size (per family or relationship, not by actual account) and average fee per client. This will help determine how many new asset management clients you need this year. It is also important to track the source and amount of net new deposits rather than just tracking total assets under management from year to year. Is the new money coming from existing clients, referrals from existing clients, or some other source? This will help identify where you should be spending your marketing efforts.
Once your get started with this type of data mining, it is easy to see other relationships that might point to increased revenues. For example, a lot of our new money is coming from existing clients who are just now retiring and rolling over 401(k) plans. These client relationships are three to five years old so now we know how important it is to stay in touch with former planning clients who are over 60 years old. You may also find that more of your new clients are being referred by area attorneys than by existing clients, so you might begin inviting the attorneys to any client appreciation events you hold.
Starting off the New Year with this level of understanding about your practice will help you prioritize your activities to be as productive as possible with your time.