Just as you set goals and measure progress with clients, benchmarking is a key part of your business success. I'm asked often about the right numbers to watch and whether those numbers will change over time.
Who should be looking at this data? Owners? Planners? Financial staff? Everyone? Certainly, the managers (usually the majority owners) need to be acutely aware of all the numbers, but it's important to share certain information with appropriate staff, especially when they are responsible for activities that generate the numbers in the first place.
Some consultants suggest growing firms need a CFO or COO. We've reviewed proposals to have our accounting managed by an outside CFO, but it's not necessary for our firm, or yours, probably.
Unless you are providing sophisticated financial consulting for clients, a CFO is way too much horsepower. However, if you have no expertise in this area, consider a part-time or full-time bookkeeper, with an annual review by a CPA firm. When you reach $5 million in annual revenues, you might consider a general manager with accounting experience.
All numbers in the financial services industry are not equally important. Key data have to be examined on a regular basis, and include operating capital, cash flow, profits, business activity and trends. Each month, we review a full set of financials, including income statement, balance sheet, disbursements and receipts.
Another major number is profit, but not just bottom line profit. In Jim Collins' book Good to Great, one key for great companies is to focus on one critical economic measure. A similar concept was a memorable scene in the movie City Slickers, in which Curly Washburn (Jack Palance) shares with Mitch Robbins (Billy Crystal) the secret of life: "One thing, just one thing."
Our "one thing" is net profit per employee, which we measure as EBITDA. This number is important because it indicates several factors: operational efficiency, staffing levels, overall financial health and the ability to compete in an increasingly competitive marketplace.
Our business model strives to keep that number at more than $80,000. If we do, it indicates all parts of our business are working effectively. When it drops below our target, we examine our operations, staffing levels, growth, capital expenditures ... everything.
Our firm is a member of the Zero Alpha Group, a business consortium of leading RIA firms that share operating data and best practice ideas. We compile data and have it available 30 days after the end of each quarter. This is what we track:
* Net new AUM
* % AUM growth (excluding market growth)
* Average fee (bps)
* Gross revenue per client
* Profit per client
* Overhead as a % of gross revenue
* Benefits as a % of gross revenue
* Total compensation as a % of gross revenue
* Gross revenue per client team
* Clients per client team
* Profit per client team member
The importance of these numbers do not change over time, unless we set different organizational goals. What's critically important to you might change what the "one thing" is for your firm.
Important information also comes from tracking prospects: where they come from, success at each stage of the sales process and the conversion rate. We conduct trend analyses.
For example, in the past five years, referrals from clients have yielded 65% of all new clients. However, in 2011, that number may be about 35% of new clients.
Is this a trend? If so, it raises a major question: If our branding and media messages appear to be working, what do we have to do to keep the trend going while continuing to harvest client referrals, as well?
Is all this really worth it? Why not just wait for the phone to ring? Because most growing firms are setting targets, making plans, analyzing their efforts and adjusting their activities accordingly.
In these difficult economic times, if you don't set targets and analyze the results, you are likely to fall short of your expectations. This examination might be painful, but it's time to dig up these sorts of numbers and question their meaning and implication.
More Numbers for Success
Other important numbers that have an impact on your business success come from outside your firm. I require all CFPs at our firm to join the FPA, attend all local chapter meetings and get involved in committee and leadership opportunities when possible.