Three key levers for better business performance

Nailing The Basics

There are some business basics that, if neglected, can hold you back for years and years. Some firms think they’ve got these areas under control, but my experience is that’s not the case. A quick review of your financials will confirm or deny that for you.

The truth for most smaller firms is that they don’t have the basics completely nailed if, after the owners get paid fair market remuneration for their role within the business, they’re earning net profit margins of less than 25% of turnover.

I’ve written about this extensively in the past and our recent Practice Management workshops focused heavily on this area. This is material you just have to get to grips with and the earlier you do that, the better.

There are three key levers that drive business performance in an advisory firm:

  • Profitability
  • Productivity
  • Client Selection

Without good data and a thorough understanding of all three areas you will struggle to monitor, improve and grow your business.

When their profit margins are calculated correctly, many smaller firms find they are earning a net profit (after the owners get paid fair market remuneration for their advisory role), of less than 10% of turnover, which is just too low. This leaves you very exposed in a downturn.

When trouble strikes, you become the bank.

If you’re running on a net profit margin that is less than 25% of turnover, you can also be capital constrained as you try to grow.

I wish someone had passed on this knowledge to me in my old business much earlier than I actually learned it. It would have saved us a lot of development time and improved our decision making.

Understanding your business better allows you to self-diagnose and perhaps, for the first time, see why your business is not performing as you want it to. It’s a bit like being able to fix your own golf swing; you need to understand the component parts of the swing to eventually correct yourself if trouble strikes.

For more information on understanding your financial ratios, check out this previous article from the FP Advance blog.

The other business fundamental I’m tackling with a lot of clients at present is effective business management. The key to success in business is identifying issues, solving them and moving forward. Everyone knows you’re supposed to work on your business, not just in it, yet most business owners I know aren’t always sure how to make that happen. It’s vital to set aside a focused, effective hour or so every week, where you can work on the business and solve issues. It’s one of the most important skills to learn and yet so few small firms seem to have been taught it or mastered it.

Another couple of fundamental and related skills are the initial meeting with prospective clients and your annual review process. A number of firms think they’ve got both of these working well enough, but when we look at them more closely in our consulting and training work, we often make some tweaks that can be life changing.

Successful initial meetings with prospects can make the difference between being able to charge for the initial work (fact finding and preparing recommendations) or not. Firms that have the skills to charge up-front find themselves in much better shape in the long run than those that don’t, because they stop doing free work and can charge more acceptable (lower) implementation fees and still be profitable.

The review service process is also critical. For some reason, when advisers first discover the Financial Planning model they greatly over-complicate it. It’s usually possible to strip out a lot of the unnecessary work in your ongoing review process and relieve a lot of pressure on the back office team and the overall costs of the business. This releases more capacity that can be used on higher value work.

Getting all of this right gives you the ability to focus on some more advanced work that really accelerates business growth; such as more effective marketing, streamlining your investment proposition, working with professional connections, building the right team and creating better business processes.

What are the benefits to excelling at these fundamentals?

Firms strip out the clients they no longer need and also strip out the work they don’t need to be doing. They begin to convert more clients at the right price, which gives them an initial boost in business financial performance, and also provides them with the confidence that they’re working on the right issues.

All of these things generate better business performance in terms of profitability, but also in terms of giving the business owners a happier, stress-free life.

If you haven’t quite nailed these basics in the past, get focused on them again. Only then, can you move forward at the pace you want to.


When trouble strikes, do you become the bank for your business? [click to tweet]


 

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