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Planning for the worst and hoping for the best

I am very proud of the fact that we run a good, healthy and financially responsible business. For our team to feel sure that their jobs are safe and for our clients to be confident that we will be around in the future to look after them, we need to have a solid fiscal plan that allows us effective decision making.

For me that has always meant starting each fiscal year with a budget. Budget, forecast, you can call it whatever you want: it’s the spreadsheet where you figure out and try to predict how much money you are going to bring in, how much you are going to spend and therefore how much profit you will make.

At least three months before the beginning of our fiscal year we start our ‘budgeting’ process. The aim is to have it sorted, signed off and everyone clear by the time September rolls around.

When a business is smaller it can be relatively easy to keep all those numbers in your head, and have a ‘feel’ as to whether things are going well or not. But the bigger you get the harder it is (and the bigger the implications are of not getting it right).

If writing a business plan each year isn’t your thing then sitting down and having to go through next year’s ‘numbers’ can be just as effective…if it gets you thinking.

So first is income/revenue. Do you have any recurring income? Are you planning on winning any more clients? If so, how many, and how much income will that generate?

  • To figure out our recurring income we take each individual client and multiply their assets by their fee %. This is then cross checked against the data we have in Curo (our CRM system) to make sure the correct info is being recorded. There is a variation in assets due to markets and in the long term we run the business based on the returns we expect to achieve for the clients. However, it’s always a bumpy road, so for year on year planning we usually assume no increase.
     
  • We also add in revenue from new asset wins. This is split between new assets from new clients and new contributions from existing clients. Granted, new asset wins aren’t predictable, but it’s a good process to go through to get a benchmark and idea of what you’re aiming for.
     
  • We have a fee guarantee and whilst we hope that our clients are always happy with the service we provide, we add a proviso for returning the fees for a % of our client bank. (If you don’t have to give any back then it’s a nice boost to your turnover rather than a shock when you need to give refund)
 
 
 

Next are the expenses or costs. These can be grouped in various ways but it really doesn’t make any difference and is just a preference thing really. These are the categories we use:

  • Adviser pay. This incorporates any targets and includes everyone who has an adviser role.
     
  • Partner pay. This is calculated at a commercial market rate (not calculated as a % of turnover or profit for example).
     
  • FCA fees. It’s always useful to see what you are paying! If the business is growing, it also helps when calculating future years.
     
  • Client deliverables. These are things that we do for our clients as part of our service. For us it includes things like quarterly briefings, production of reports and guides, the printing of our client agreement etc.
     
  • Salaries and NI. Don’t forget the NI! Before the start of each new fiscal year, I meet with the team leaders to discuss where people are at, and what raises they would like to give.
     
  • Team bonus. This is tied to the revenue target of the business so is useful to see separately in case the target isn’t reached.
     
  • Pensions and benefits. Whilst we have always matched pension contributions at 5%, this year we put it into its own category so we can see the impact of auto-enrolment.
     
  • Marketing. A good rule of thumb for your marketing budget is 5% of revenue to stay at your current size and 10% to grow the business. How much you spend and how you spend it should be correlated to the asset wins you’ve forecast in the revenue section.
     
  • HR. This includes recruitment fees, training, HR consultancy etc. (Quick tip: if you have to use a recruitment company always negotiate on the rate. Depending on the salary range we’ve been able to get a flat rate or a reduced % of between 10-14%)
     
  • Office premises. These are things like rent, rates, service charges, electricity, security, cleaning, waste disposal etc. It also includes repairs and maintenance, an often forgotten category that can erode your profit.
     
  • Office admin. For us this includes phones, copiers, office stationery, milk, coffee and our breakfast costs.
     
  • IT/tech. We pay an annual fee to an IT company to look after all our technical needs and troubleshoot for us. Since we have moved to the cloud we also pay a monthly license fee for Outlook, Curo, Sharepoint (our shared file storage system) etc. The number of staff we have dictates the number of licenses we need, so our hiring plan relates to our IT budget.
     
  • Accountancy/consultancy/legal. This includes our audit and payroll costs, leases, compliance consulting and any additional resources that we bring in for short periods. For example, this year we hired a cyber security company to review all aspects of security ranging from network to security to staff susceptibility.
     
  • Insurance. This is mostly Professional Indemnity (PI) with the premiums increasing whilst it’s been harder and harder to get.
     
  • Depreciation. This is the reduction in value of our fixed assets and is done on a schedule that our accountant has calculated.
     
  • Charitable donations. Each year the business donates money to The Equilibrium Foundation, which in turn distributes it to good causes in our local areas.
 
 

The income minus our costs gives a profit, which is then distributed between the equity partners commensurate to their share of the business.

Managing a successful business is more than just sales. You need to know your numbers and make educated decisions based on them.

Update: I started writing this blog before Friday’s Brexit results. In light of the results I am going to go back to our budget to update our turnover expectations and new asset goals with a less optimistic outlook to allow for market falls.

I’ve also begun conversations with all of our team leaders to review the costs and adjust for a more cautious approach. It’s not a comment on the Brexit outcome but an exercise in being prudent. I have a responsibility for the team we have employed and to the clients that we service.

It does no-one any favours if I act naively, so I’m planning for the worst, and hoping for the best.