There is a big difference between wealth and affluence and there is a big difference between running a practice that is making sales and one that is making profits.
When times are good and business is flowing in the door, many planners forget about the responsibility to keep costs under control. The past few years have been kind to the planning profession with markets running hot and legislative changes to superannuation that have ensured a steady flow of new business to our doors.
The Warren Buffet adage, 'that it is only when the tide goes out will we find out who's swimming naked', is unfortunately true of many planning practices today. Like the affluent professional that is earning a salary of several hundred thousand dollars and has a lifestyle to match or even surpass his earning power, many planning businesses have increased their expenditure at a rate to match the increased revenue flowing from the plethora of business pouring in.
We become like gas in that we expand to fill the available space. The current good times will not go on forever and when there is a slowdown or a reversal in the markets that could cause new business to dry up we will be left with a costly infrastructure that is unsupportable. Too many businesses have been valued based on recurring revenue rather than business profitability and this has led many proprietors to ignore profits and to simply focus on sales. There has been unprecedented wage inflation in the financial planning and funds management sectors as different organisations have participated in a bidding war that has led to unrealistic expectations.
Many younger people coming into the profession have never experienced a downturn and they have become enamored with the belief that they can change jobs every year or two for an ever increasing salary and bonus package. Loyalty and building a career with an organisation that has an ethos and purpose you can identify with has sometimes been replaced with the mercenary job change for the sake of an extra $10,000 per year. The payrolls of many larger organisations have become bloated. When a crisis or downturn strikes it will initiate a shedding of jobs that will see the last in being the first out when it comes to redundancies. This is likely to occur at time when there are fewer new jobs to find as like businesses are also forced to batten down the hatches.
Salaries are the largest expense component of any professional service firm, but a period of good times has led many planning firms to lash out with additional premises and expensive long-term leases as well. Expensive office furniture and luxury car leases have also become some of the external trappings of success that help assuage the healthy egos of the new planning tycoons. There is a fine line between spending money to create a professional image and getting caught up in the very activities we warn our clients about in relation to living beyond your means.
The key to applying good financial planning principles is the sound use of all your resources. Charles Dickens put it very well when he wrote in italics--- Great Expectations ---ITALICS , "the definition of happiness is earning twenty pounds a year and having expenses of nineteen and six. The definition of misery is earning twenty pounds a years and having expenses of twenty and six". As planners we should be modelling the behavior we expect in our clients. We need to be able to speak with some authority on the prudent management of money.
Good practice management requires good financial management and a solid budget that is adhered to. This takes discipline and an eye for expenses as well as revenue. It is often more appropriate to cut expenses in order to meet budgeted targets than to rely on increased sales. Too often it is seen as easier to hope that sales pick up rather than taking pre-emptive action to rein in costs. This can lead to a denial that there is a problem until it is too late. The problem with letting salaries blow out unrealistically is that you can never put the genie back in the bottle. Staff will not take too kindly to a pay cut or loss of privileges. You are far better off to reward staff with the certainty of a career path and rewards related to business profitability and their long-term retention in the firm.
It seems incongruent to be writing about managing the expenses of a practice at a time when we have unprecedented inflows of new business, but this is the very time when we should be preparing for less abundant times. The bad habits that have crept into many businesses will mean they will be less able to cope with a market downturn. We may see increased margin squeeze and regulatory pressure at the same time. Many businesses have not built up sufficient reserves to see them through the inevitable lean times that are part of a cyclical business like a planning practice. We have got a great future ahead of us but we need to be sure we can weather the storms along the way, and our recent successes may just have led us into a sense of complacency that is not only unhealthy but against the prudent management of the capital we hold so dear.
