Financial advice firms that want to grow have an unflinchingly honest mirror: the profit and loss statement. My consulting firm has studied thousands of P&Ls over two decades of consulting. Today, I can look at one and quickly understand the goals of the business.
At times, the leaders of these firms tell me something different than what the P&L is telling me. In such situations, the first issue we need to resolve is the misalignment between how money is being spent and what the firm's true goal is. In other words, when the leader of a firm wants to set new goals for growth, like client acquisition or hiring, the P&L is the place to start.
This column will address several key areas to look at to help determine if what you're spending the firm's resources on is consistent with your growth goals. First, it's important to identify the issues that can be deceptive. Once they're identified, they also must be addressed. For many firms, step one is cleaning up the P&L so the information being used is up to date, accurate and unbiased.
Drill Down Into Your Data
When firm leaders look at a P&L, they're looking at numbers from the past. If the goal is for future numbers to show higher revenue growth, greater profits, etc., they must first decide what numbers to look at that will produce the desired change.
Advisory firms often want to improve their future performance and will regularly tell me they want their growth rate or profit margin to be a certain number, their staff compensation to be this figure or that and their spending on marketing — according to a benchmarking study they've just seen — to be at a certain level. In other words, they believe they should adjust their P&L to align with industry benchmarks.
Instead, it's best to step back and look at the problem differently. What's the return on investment for what you are spending today and is it working?
I've seen firms spend significantly less on marketing than the latest benchmarking standards but grow at levels that top the average benchmark. Additionally, I've seen firms with both lower staffing costs and significantly higher growth rates than the benchmark. The point is, the benchmarks you set for your firm should reflect the unique goals of your individual firm — not the industry averages.
When using your P&L as a business guide, the goal should be for the owner or owners to honestly evaluate how they're spending resources to achieve their goals. If these expenditures are not producing the desired results, course corrections need to happen.
Survey Staffing Expenses
This leads us to the matter of overall staffing costs. Is your business overstaffed, understaffed or staffed just right? The majority of advisory firms are overstaffed.
Why is this the case? Because their leaders make staffing decisions based on projected growth, or more accurately, on the growth they aspire to. If these firms' current growth rate is 10%, they're hiring as though the growth rate is 20%, for example, without the capital to back it up in a sustainable way.
