Successful businesses spend time predicting and tracking revenue. Some use spreadsheets, ratios and specialist software, while others use a crystal ball. Indeed, there is a tendency to over- or under-engineer this essential activity but there are some best practice techniques that are important.
The starting point is the three-year business plan. The level and mix of revenue, along with costs and profit, is central to this, and attention should be paid to the projections and related assumptions. Good practice involves consideration of the following:
- Broad trends in the advice market and specific target segments
- Macroeconomic trends, particularly growth, inflation, interest rates and international influences
- Regulatory changes that may influence the level or mix of revenue
- Policy changes that may affect specific areas of business
- Past performance of the business and the main revenue earners
- Changes in the structure of the client base segmented by client value
- Specific marketing and business development activity designed to influence revenue.
Obviously, pinpoint accuracy is hard to achieve but each of the above is important and judgements must be made. It is essential to record your assumptions so they can be tested and updated when you come to review your longer-term forecasts, ideally quarterly.
Part of the three-year planning process is to identify how progress should be made annually. This helps test the feasibility of the target and confirm exactly how the projections will be achieved. Advice firms often relate this back to the number and revenue value of new and existing clients. If you have the necessary data, this is a powerful way of translating the plan into business activity and checking progress. Everyone in the business can relate to this and will have some influence over the outcome.
Three-year plans often include a range of financial targets to account for some of the less predictable developments in the market. However, they can only be achieved through the precise shorter-term one-year operating plan that includes the budget for costs, revenue and profit. This is where each of the trends in the list can be reviewed to produce a more accurate target linked to revenue earners and client groups.
The role of incentives and the structure of reward and remuneration plays an important part, as this influences the level and mix of revenue. Factor in changes to fees, the balance between revenue from new business and ongoing servicing fees and, if the latter depends on stockmarket movements, assumptions about how that is likely to change.
To manage the level of risk related to financial performance and revenue, aim for the following:
- A policy of relatively low initial and high recurring income
- An increase in the use of project fees or fixed servicing fees where possible – which are not directly linked to fund values
- A mix of recurring income that continues to move rapidly away from traditional trail commission toward ongoing adviser charges
- An effective invoicing and debt management system
- Diversified sources of business and a steady flow of new clients
- Up to date and accurate financial data that is regularly reviewed.
This will enhance the stability and predictability of your revenue so you can benefit from more accurate projections. In addition, if there is an unforeseen change in the business, particularly loss of markets or advisers, you can more effectively model the impact and make amendments.
Finally, the art of accurate projections is supported by regular and detailed reviews and adjustments. This is achieved as part of the wider management information system that should provide all the headline data required to monitor and run the business.
To ensure your management information process works well you should:
- Identify the data that is going to be useful
- Work out who will produce it and how frequently you need it
- Link it to Gabriel data collection
- Set clear targets for all data to monitor progress
- Look for the trends and compare over time and against industry benchmarks
- Make sure you have a specific point in your management meeting when the data will be discussed
- Make sure actions are documented and followed up (particularly important to provide evidence to the FCA of how well the business is being managed)
- Share as much of this information as possible with your staff.
The final point is essential, particularly if part of your reward system is linked to financial performance. People need to understand if progress is being made or what needs to be done to rectify a deteriorating position.
Making financial projections for the business is similar to planning for your clients. The good practice that you deploy with the latter can be used at the business level: consider all the important factors, identify and record the assumptions, use best judgement to make the projections and review and adjust on a regular basis.
David Shelton is a consultant at Stoke Bishop Associates