“Coach’s Forum” is a place in which you can ask your questions, tell your stories or give your opinions on any aspect of practice management. For each column, George selects the most interesting and relevant comments from readers and offers his advice. Our objective is to build a community of people with a common interest in making their financial advisory practices as effective as possible.



> A Lesson In Budgeting

Advisor: I am a relatively new advisor who came into the business late in life after a long career in another industry. I love the work and I am pretty confident this is what I will be doing until the day I retire.

One of the biggest personal adjustments I have had to make is dealing with the extent to which my income fluctuates on a month-to-month basis. I have discovered that I am more fortunate than many newbies because I have some personal capital to fall back on if needed. However, my practice will eventually need to operate on its own cash flow and according to a budget — that’s how I ran my previous business. How do I plan and budget with no history to guide me?

Coach says: Congratulations on making the decision to become a financial advisor and for taking such a businesslike approach to getting started. In my experience, too many people come into our industry unprepared to make the hard decisions necessary to build a solid foundation to their practice.

However, like you, many new advisors with a background in an established business soon learn that it’s not easy to apply all the disciplined systems they had relied on previously to their new career. Budgets are a good example of this — they are essentially forecasts based on past experience and future expectations; however, if you have no past, you have no basis for making projections.

If there is any good news in this, it is that you are not alone. Almost all advisory practices experience uncertain and erratic income until they are able build a sufficient amount of recurring revenue, either through consistent sales results or a steady stream of ongoing service or asset-management fees.

That said, I believe it is a good idea for even the most neophyte advisor to create as realistic an operating budget possible. The process reinforces the need to approach your new career with the same business sense you would apply to any other venture. Here are some suggestions to help:



> Start With Expenses, Not Revenue. Although this may appear to be counterintuitive, it is essential to have a good grasp of your costs and expenses on a monthly basis for at least a year. For most advi-sors, this is also much easier than predicting revenue. Here are four basic steps to follow:

1. Determine your fixed expenses. This includes things such as rent or office fees, staff, wages and benefits, parking, telephone and email. The biggest fixed expense is the one most advisors omit — their own income.

I am a huge proponent of advisors paying themselves a hypothetical “salary” rather than simply taking what is left over each month. I know it flies in the face of the entrepreneurial oath you metaphorically swore to uphold when you came into the business, but doing so creates a sound discipline of managing your business for profitability, not just income. If the business can’t pay you regularly, it isn’t functioning as it needs to. Set the amount at a level that allows you to maintain your basic lifestyle. When you have those big income months, you can always award yourself a bonus or set some of the extraordinary revenue aside for those months when your revenue falls short.

2. Determine your one-time and capital expenditures. Be sure that all of your anticipated one-time expenditures for things such as equipment, marketing materials and licensing fees are accounted for. Note the anticipated dates for major expenditures and decide if they are to be financed or paid for out of cash flow or personal capital, then incorporate the cash outlay or financing charges into your projections.
@page_break@3. Determine your variable costs. For most new advisors, these will be mostly direct client acquisition costs in entertaining and marketing activities. It may be helpful to calculate these costs as a percentage of your revenue once you have determined what that will be. Hint: a minimum of 10% of revenue is a good target for a new advisor to spend on marketing.

4. Project your break-even revenue. It is important to know the dollar amount of revenue that exactly covers all of your variable costs and fixed costs (including you), with nothing left over for profit. It’s also an important indicator of risk because it shows you how close your business is to the “no profit” line.



> Forecast Expected Revenue. Because you do not have past performance to guide you, with respect to revenue, you’ll have to pull together as much information as you can from all sources. Talk to your manager, other associates, a coach or head-office trainer.

There are basically only two things that will combine to determine your revenue: the number of new clients you add in a given period (e.g., monthly); and the average revenue generated by each new client. The number of sales is likely to be proportional to the level of your activity — more prospecting should lead to more sales. Think about your marketing and promotional plans. What results can you realistically expect? The average revenue per new client is usually influenced by the profile of your market — the more affluent your market, the greater revenue you should anticipate per client.

Take into account that there are seasonal and cyclical fluctuations in our industry. For many advi-sors, summer is a less active period because of client vacations, and upbeat markets tend to yield more sales than “down” markets. Ask other advisors with experience to help you establish your initial expectations.

I like to create budgets for both conservative and optimistic scenarios. In fact, I like having three forecasts: most likely, worst-case and best-case. Although you do want to make the most realistic assessment possible for your operating budget, it is prudent to develop contingency budgets for a range of possible outcomes.

Strategically planning for lower-than-hoped-for revenue isn’t being cynical or pessimistic; it is practical and allows you to be proactive, without panic, when you see things aren’t working out as hoped. And planning for better-than-hoped-for revenue can allow you to accelerate your business plan with breakthrough ideas and strategies to grow your business faster than anticipated.



> Making It All Work. Your operating budget is a tool that can tell you whether or not you are on track financially. If you experience unexpected revenue increases or expenses, your budget serves as an “early-warning system” to alert you to those changes. The key is to make the commitment to create a budget and then make it as simple and effective as possible.

There are three primary financial statements that should be used in conjunction with your budget: the income statement (profit and loss), the balance sheet and — especially with significantly variable revenue — the cash-flow statement. Reviewing and monitoring these statements along with a regular, ongoing operating budget is the key to having a strategic grasp of your practice’s financial health, performance and progress.

One of the most common mistakes business owners of all types, including financial advisors, make is to treat their budget as a one-time exercise or a once-a-year process rather than seeing it as a living document to be used to run the practice day to day.

There is one final point I’d like to make: most financial advisors are not particularly good managers of their own finance, even though they are in the business of helping people manage their wealth. The bottom line, however, is that — regardless of the length of time you have been in the business or the nature of your practice — creating and using a budget and managing your cash flow is not only something you can do. It’s something you must do. IE



George Hartman is president and CEO of Market Logics Inc. and a senior coach and facilitator with the Covenant Group. His latest book, Blunder, Wonder, Thunder: Powering Your Practice to New Heights, was published in January. Send questions, comments and opinions on any aspect of practice management to george@marketlogics.ca.