Practice management: Boost your profits using business metrics

“You need metrics to figure out whether you are optimizing your time to deliver your services,” says Pierre McLean, senior vice president of sales with Franklin Templeton Investments Corp. in Toronto, “and whether your practice is profitable.”

While many advisors use revenue growth as a measurement of business performance, McLean says, profitability is ultimately the key measure of success. Just because your revenue is growing does not necessarily mean your bottom line is growing, too.

To measuring your profitability you must take into account the cost of client acquisition and maintenance, advises Julie Littlechild, president of Toronto-based Advisor Impact Inc. “Business metrics allow you to take a harder look at not just your top-line but also your bottom-line when determining what’s driving your business,” she says.

Here are some metrics you should consider using when measuring the profitability of your business.

> Growth of assets
Track the growth of your book over a defined period of time, suggests George Hartman, CEO of Toronto-based Market Logics Inc. Your profitability should increase as your assets grow.

Measure variables such as new accounts, average account size, retention rate and lost or closed accounts. Is your average account size falling although your total assets are growing?

Also, look at growth by source, advises Littlechild. Are new assets coming from existing clients, client referrals, centre-of-influence referrals or prospecting?

Measure how much growth is attributable to market performance, Hartman advises, and track the ebb and flow of assets due to seasonality.

> Fixed and variable costs
Keep tabs on both your fixed costs and variable costs. Don’t forget to include a cost for your time.

“Many advisors do not allocate a cost to their time,” Hartman says, adding that that is probably one of the biggest costs to a practice.

Littlechild recommends measuring costs associated with such activities as marketing, prospecting, client meetings, centre-of-influence meetings and financial plan preparation.

Measure by activity, she advises: “Look at how much time you spend managing vs running your practice.”

> Client revenue
Measure the revenue that comes in from each client. You may find that size of client does not necessarily mean greater revenue. Also, Hartman suggests, determine what percentage of your revenue is recurring.

> Client profitability
“Your success is all about client profitability,” Hartman says. Calculate profitability by subtracting fixed and variable costs associated with each client from revenue generated.

Client profitability comes down to how much in resources is applied to serving the client vs how much revenue is generated, Hartman says.

> Productivity
Productivity of your team is an important business metric, Hartman advises. Productivity is measured in revenue and clients per staff. Observing rising or falling productivity would allow you to determine resource allocation and whether to tweak your processes to improve profitability.

IE