We’ve just begun to analyse our latest dataset (based on practices who have ’HealthChecked’ their business over the last 18 months). And while there is still much analysis to be done, a couple of interesting stats have jumped out at us already.
In this article, I’ll focus on one of my favourite subjects – when is a business, really a business?
Assuming a “notional” salary of $100k for each working owner, we calculate that for practices with gross annual revenue of less than $500k their average profitability is just 7.6%. In fact, almost a third of practices in this dataset are actually losing money once a $100k salary for the owner is factored in.
This, to my mind, begs the question – is this level of return commensurate with the time and effort you, as the owner, are investing and the business risk you’re taking. Is your primary role, that of a financial adviser or business owner?
Other attributes of practices in this category include:
- Number of clients = 220
- Number of staff = 2 (1 adviser, 1 support person)
Looking at the next level up, the average notional profitability for practices with around $750k annual revenue jumps to just over 30% serving some 550 clients, with 4 staff in total. This is getting closer to what we view as an acceptable return for the effort expended.
It seems to us at Business Health that, given the base level of cost to actually run an advisory business, scale is now essential to achieving a reasonable ROI. Of course, we now need to also consider the impact of the double whammy of FASEA’s education requirements and the likely outworking of the Royal Commission’s recommendations.
If you agree, you might like to consider the following strategies to grow your scale, as a most intriguing 2019 begins to unfold:
- Increase your own ‘front office’ activities – get in front of more clients, prospects, referral partners. Review how your licensee, professional association or favourite product manufacturers can help.
- To achieve the first point, you’ll need to invest in the ‘right’ type of person, to whom you can entrust the running of your back office. Develop, delegate and incentivate but don’t dump!
- Have your fees been reviewed to take into account the impact of the Royal Commission on your business?
On the expenses front:
- Have you costed your key services lately – does your fee structure cover the actual cost to deliver?
- Are you fully leveraging your investment in technology or is there more functionality you should be taking advantage of? This is an area which seems to us to soak up a disproportionate amount of dollars when compared to the return it generates.
- Is outsourcing an option for some of your non-core activities?
Develop a plan for the next 12 months, which specifically includes:
- How many new clients you need.
- Where they will come from.
- What do you need to do to secure them.
- Put it in writing and track your progress every month. Empower someone you trust to hold you accountable to it.
Turning to the bigger picture, is it time for you to consider a new business model? Maybe a merger or joint venture with another firm for example.
Finally, all of the above needs to be considered within the context of your own personal plans and goals – have you given serious thought to your own transition? If you haven’t, you’re not alone – according to our data, just 12% of Australian firms have documented their plan for succession, identified a suitable successor and arranged for funding. While you may not be alone, you certainly don’t want to be too far behind – this clock is certainly ticking!
If you’d like to talk through the implications of the above, as they might play out for you, don’t hesitate to give us a call or email at – email@example.com.
For your consideration.