Advisors who develop a business plan are more likely to realize success—that is, if they revisit their plans and hold themselves accountable. As your firm grows, your vision for your business may change significantly, meaning your business plan will need to change, too. But a plan shouldn’t be reactive; it should help you lead the change you want to see as your firm develops—and that means it will require regular review.
How can you turn your plan into a tool to take your firm to the next level? And how can you measure your business success along the way? Below, I’ll break down the essential components of an effective business plan, as well as the key performance indicators (KPIs) you should be measuring to ensure that you’re on track to meet your goals.
What Does a Business Plan Do?
A well-prepared business plan should do the following:
- Align goals, people, and processes. Does your firm have the right headcount to support revenue, the right talent to achieve goals, and documented procedures to ensure that everyone knows what’s expected of them?
- Maintain momentum with realistic goals. Setting the right goals prevents fatigue and pushes you forward. More so, realistic goals are a microcosm of the business vision and strategy—they help track that the right things are, in fact, happening.
- Outline stretch goals. Develop stretch goals to nudge the business further in the right direction.
- Initiate action that leads to results. Quarterly reviews of goals are ideal and should be easily reportable with measurable results. The easier a goal is to remember, the more likely everyone will be to integrate it into their day.
Tracking KPIs to Achieve Your Business Goals
Now that you know what your business plan is supposed to do, how do you measure if it’s actually doing it? KPIs should be added to the plan to measure your business success. When determining your vision, developing strategic directives, or listing goals for the year, you need to be able to quantify them. Here are three KPIs to measure in any business plan:
1) Profit margins. Most business plans start with a growth objective. While many growth rates track the market, healthy profit margins mean that the revenue, people, and processes are in optimal shape. A business can be profitable and not grow, but not the other way around.
Gross profit is the amount the business profits after deducting the advisor’s salary. For example, the average direct expense for Commonwealth advisors is 35 percent, so the average gross profit margin (GPM) is 65 percent of revenue. What does this mean for your firm?
If your GPM is below average, that means revenue is too low or the cost of advice is too high. Revenue can only be increased by adding clients or raising fees. Adding clients has a greater effect on overhead than on direct expenses.
If your GPM is above average, you may need to add an advisor to support revenue—or perhaps there’s an opportunity to invest in the client experience.
Keep in mind that many advisors—especially solo practitioners—do not pay themselves a salary. Even with this compensation structure’s flexibility, it is important to earmark revenue for direct expenses for budgeting purposes. Knowing how your direct expenses compare to the industry is also critical for pricing your financial planning fee or AUM fee.
Operating profit is the amount of dollars left over once you have paid direct expenses and all overhead expenses. The average amount of revenue that goes to overhead (the overhead expense ratio) is 40 percent for Commonwealth advisors. This means that 25 percent is the average operating profit margin (OPM) once all expenses are paid.
If your OPM is at or below average, revenues should be increased and expenses decreased. If fees are in the right place, then adding new clients should be part of the business strategy. Focusing on ideal clients is worth it because even if one “A” client household requires more time and money to serve versus multiple “D” clients, it’s much more profitable time that your firm is spending. In addition, scaling exceptional client experiences becomes increasingly harder as the volume of clients increases.
If your OPM is above average, the firm has capacity to invest back in the business and the client experience. More important than revenue growth is growth of the bottom line. Expenses should support revenue growth to ensure the type of experience your clients expect.
2) Growth rate. Will your current growth rate get your firm to where it needs to be in three to five years? If you have a five-year vision for the firm in terms of AUM and number of clients, how many new “A” clients will it take to get there? How many advisors and staff do you need to support an exceptional client experience? Great service retains your clients and leads to referrals. For most firms, withdrawals cancel out contributions. Organic client growth is how firms grow consistently year over year.
3) Productivity and profitability ratios. Productivity goals should be set to outperform your office goals, not the industry’s. A lot of this data depends on the office reporting structure, the breadth and depth of service, your ability to outsource, and the talent within the organization.
- Revenue per client: This measure tells you the average revenue for all active households—that is, net revenue divided by the number of households you are actively meeting with for reviews. Growth is scaled only by adding clients who meet or exceed this amount. Clients below this threshold may be appropriate for a financial planning fee.
- Revenue per advisor: How much revenue is there to the number of advisors servicing clients? This leading indicator will tell you when it’s time to hire another advisor or become more selective about clients.
- Revenue per headcount: This figure looks at the office headcount as a whole. Sometimes it’s more appropriate to add staff to support revenue than to hire an advisor. Using this metric with revenue per advisor is recommended when trying to understand if your office has room to grow or needs to scale the client experience.
- Households per headcount: Here’s the number of client relationships to the number of folks available to pick up the phone when clients call. If this number is growing, there’s a need to customize plans less and scale client reviews more. If this number is diminishing, you have capacity to add additional households.
Making Your Vision a Reality
As we head toward the end of the year, it’s a great time to use some of these metrics and tools to see how your current plan has performed, as well as to set yourself up for success in the future. Here are a few tips to get you started:
- Set up quarterly business reviews. Treat the business like a client—set up quarterly reviews to go over progress on goals.
- Pluck low-hanging fruit. What activities take too much time? Look for ways to outsource and automate processes using technology—especially in the investment management and meeting prep areas.
- Be flexible. Many external factors can affect your business plan, from regulatory changes, to economic trends, to demographic and technological changes. Being ready to pivot to address a new need is essential.
By following these tips, reviewing your business plan regularly, and tracking KPIs consistently, you’ll have the tools and strategies in place to achieve your goals and make your business vision a reality.
How do you measure your business success? Are you tracking KPIs or using another method to monitor your progress toward your goals? Please share your thoughts with us below!