8. Understand Your Own Risk Tolerance And Required Return
You are familiar with the "efficient frontier"
concept-any investor taking risk should get an appropriate return. How
many of you apply that concept to your business? What rate of return
will an investor (you) demand to hold a risky security (your small,
closely held business) in their portfolio?
Ensure you have adequate systems in place to report
(even if it's just to yourself), evaluate and understand your
investment returns and monitor your investment performance. In the
financial structure outlined above, we described operating profit as
the dollars that remain to fund future growth, distribute as firm-based
incentive and pay a return to owners. In regards to the third
component-the return on ownership-what is an appropriate level of
return for an owner in a small, closely held private business? Is such
an investment more or less risky than a Treasury bill? A certificate of
deposit? A blue-chip stock? If more risky, then what should the
required rate of return be? We like to see advisory firms generating a
consistent 25% operating profit margin as a minimum level of return for
what is a relatively risky investment.
Understand the risk/return requirements of your
staff as well. In a presentation she and I gave last fall on people
practices, Deena Katz described two kinds of staff and what kind of
"investors" they are in your business:
A.Stockholders, those who are invested in building a
career with your organization, invest considerable time and energy and
take ownership in driving the business forward; and
B. Bondholders, those who consider
their job a job. They show up-physically, mentally, emotionally-but do
no more than show up; they don't want to take the risk or make an
investment.
Both types of employees may have a role in your business, but recognize
where their commitments, and therefore their opportunities, may differ.
And be clear to your staff what kind of personal investment you expect
to see them make in the business, and what kind of return that will
warrant. It is the "stockholders" in your organization who drive the
business forward.
9. Educate Yourself
Read. Learn. Digest. Decipher. Most of you are avid
at staying on top of what is happening in the market and other trends
that will impact your clients. Educate yourself as well on what is
happening in your business and trends that will impact your business.
Teach yourself to be a better business manager and a more effective
leader. Perform ongoing due diligence on your biggest investment-your
business-and take a close look under the hood. Track your financial
statements and financial ratios on a monthly basis, and understand what
they mean. What does the trend in gross profit margin mean? What does
the trend in clients per professional indicate about your professional
productivity and capacity? What does the trend in profit per client
indicate about your pricing?
Educate your staff, too. Involve them in the
learning you do related to your profession, encourage them to
participate in industry conferences and outline a plan every year on
how they will improve their technical skills, both through formal
continuing education and structured on-the-job training. Educate them
on practice management as well. Involve them in your strategy, either
in the development of the strategy or at least in the communication of
the strategy and the implementation of the tactics.
Share your income statement results with staff on a
monthly basis, at least at the summary level shown above. Most advisors
who are reluctant to do so are embarrassed about how much money they
make, or worry that their staff will want to know where the dollars at
the bottom line go (and why not into their pockets since they are doing
all the work?) Instead of hiding information, educate your staff on the
difference between return on labor and return on ownership and on the
rate of return required for an investment that has more risk than a
blue-chip stock. Hopefully they will find the returns compelling enough
to aspire to make a financial investment and be an owner one day
themselves.
10. Monitor And Revise Your Plan
In addition to monitoring your financial
performance, monitor the achievement of your tactical goals and
implementation of your long-term strategy. Tie staff's incentive, and
your own, to the accomplishment of goals that will move you
incrementally closer to achieving your strategy.
As with a client's investment plan, revisit your
strategic plan once a year. Make sure your long-term goals have not
changed, and that your plan is still appropriate in light of any
changes to the four perspectives that you considered in developing your
plan. Adjust your course if required. Make sure you are being true to
the guidelines outlined in your strategic plan. Be disciplined.
You are a talented advisor and a skilled investor.
Turn even a fraction of these skills toward your business, and you will
find it has as meaningful an impact on your business, your family, your
staff and your life, as you have on your clients' every day.
Rebecca Pomering is a principal in
Moss Adams LLP and consults with financial advisory practices on
matters related to strategy, compensation, organizational design and
financial management. She is co-author with Mark Tibergien of the
recently published book Practice Made Perfect.