Welcome to my last expert article for Growing Business! Over the past three articles we have looked at finding business partners, associates, and outsourcing partners, all of which are things you will need to consider at some point during your business’s lifetime and are hard decisions to make
Today I am going to give you a present – a financial model. This is something you can use to measure how far you have come and where you need to go to continue your success, so it’s really quite important that you think about and answer each aspect as best you can.
I think there are four aspects to the financial model:
- How is the firm doing?
- How are the consultants (and associates) doing?
- How are the clients doing?
- What other financial drivers are there in the business?
Without getting in to “Analysis Paralysis”, let’s look at each of these in turn:
1. How is the firm doing?
Items to track/monitor could include:
- Sales growth
- Earnings before interest and tax
- Gross margin
- Net margin
- Debtor days
- Liquidity ratio
These would all be “actuals”.
2. How are the consultants (and associates) doing?
Meaningful numbers to track would include:
- Utilisation levels (i.e. number of billable hours)
- Value of business introduced
- Number of “live” clients under management per consultant/associate
- Number of opportunities per consultant/associate on the pipeline report
- Conversion ration per client/associate
3. How are the clients doing?
It would be helpful to know:
- Number of clients
- Average value of clients
- Number of clients on retainers
- Number of clients who have used the firm more than once.
- Average client life
- Client classification in terms of value to the firm (N.B revenue level may give a different picture to profitability level, depending on the underlying maintenance effort required. In other words, your biggest client may not necessarily be your best.
4. What other financial drivers are there in the business?
These could include:
- Level of finder’s fees paid (and to whom)
- Breakdown of sources of business
- Bad debt history
The final part of the model will probably relate to remuneration policy. If all consultants are “partners” in the practice, then you will need to have an agreed policy regarding what level of fees after costs remains in the practice, and what can be taken out.
If you have associates as well, then you will need an agreed formula regarding net payout to them; a 60% to 70% payout is not unreasonable, with the balance reflecting the marketing and sales effort required to find work for the associate, the use of proprietary tools and models, and the administrative effort to process the contract. If the associate is sourcing their own work, but under your banner, then a higher payout might be justified than if you are finding all their work.