Law school may have taught you how to be a great lawyer but it didn’t teach you how to evaluate and understand your financials. Why is this important?
Let’s face it, you went to law school to practice law, not to do accounting. Accounting for law firms can seem overwhelming and time consuming. Actual it is both of those, but it’s a requirement and there are standards to follow if you want to keep your license and ability to practice law.
When growing a business, one of the most important things you can do is understand what your financial statements are telling you.
Understanding your financials will help you spot trends, make decisions, and be more profitable because you will be more proactive in making changes.
MESSY BOOKKEEPING IS A COMMON OCCURRENCE WE SEE IN BUSINESS. USUALLY THE BUSINESS OWNER HAS ATTEMPTED TO DO THE BOOKKEEPING THEMSELVES OR THEY’VE HIRED AN UNQUALIFIED BOOKKEEPER.
No matter how it happened, it’s good to realize the current state of your accounting and get it on track.
Service-based business owners have no problem focusing on new customers and serving current customers. But many don’t know how to take their business to the next level. If you’re looking to grow your business, you must pay close attention to your financials and key metrics. Key metrics are financial numbers that you need to hit in order to reach your overall goals. When planning with clients I always tie a goal to a metric or target. How else will you know you achieved the goal?
Here is a list of 4 key metrics that are important to track in your service-based business.
Sales Close Ratio. You get this number by dividing the number of sales proposals made by the number of proposals you closed. This tells you the percentage of proposals you win. Obviously, you want this number to be high, but not too high. Chances are if you’re closing 90%-100% of proposals you make, you are walking away from money on the table.
Project Margin. This metric measures the profit you will make on each project you undertake. It is the percentage of project revenue - direct costs you will pay to complete the project. The higher the number the better!
Profit margin metrics will help you with making profitable proposals and driving overall profits. I recommend determining your lowest acceptable project margin. Then, when you are giving new proposals be sure to never go below your minimum.
Monthly Operating Expenses. Your operating expenses are the expenses you have every single month. Why should you know this number? Because this is what you will have to spend each month just to keep the doors open. You’ll spend this even if you have zero collections. I suggest taking your annual operating expenses and dividing by 12. This gives you a monthly average.
You can also use this number as a target for how much you should have in savings. In an ideal world having 3 to 5 months cash set aside would be sufficient. In reality, it takes dedication and time to get that built up.
Billable Utilization. This rate will help you track productivity. On an annual basis you’ll divide the employee’s total billable hours by 2,000 hours. This gives you each employee’s productivity. You should monitor this to determine if you have space to add more client work or if it’s time to add more employees.
However, I don’t think this number should be monitored by itself. An employee can have a low utilization rate but it’s out of their control. You must also look at overall profit, prospects in the pipeline, and marketing budgets.
Why are these numbers important for growth? Because growth cost money! Your business goals must be aligned with your resources (time, money, and energy) or you’re setting yourself up for failure.
If you’re struggling to monitor and track your financial information, contact us and we can schedule a free consultation to see if we can help get you on track.
I recently met with a prospect that was interested in growing her business (super exciting stuff... my favorite prospects to meet with!). Her energy was contagious and I could tell she had a passion for what she was doing. It made me even more interested in how I could help her achieve her goals. Our conversation started off with her talking about her business- what service she provides, her customer demographics, the values her business holds, and where she wants to be in the next year or so.
Great! She had that info down and rattled off answers to all of my questions.
It was downhill from there.
The conversation continued with "Okay, this is where you want to be. Where are you now?"
Her response was "Well... I'm not real sure what our sales are. Nope, not real sure what my gross profit is. Ugh, no idea how much my monthly payroll runs."
What?!? I followed that up with, "How would we monitor your growth if we don't know your numbers?"
What I went on to explain to her was that it is impossible to do financial coaching or growth planning without accurate numbers. Accounting can be overwhelming and intimidating but numbers are concrete. They provide a map to your growth (positive or negative). They allow us to monitor progress, make adjustments to your strategies, and keep growing.
So at the end of the day you can have the best action plan and strategies, but without the ability to rely on your numbers you won't be able to measure whether you're going to reach your long-term goals or not. You need to be able to tell whether your plans are really working, or if you should change tactics to reach your goals.
If you've been relying on bad numbers, or NO numbers at all you should consider outsourcing your accounting to an expert. Let's setup a time to chat and see how we can help you GROW your business.
A group of my peers were recently discussing a blog post written by another service provider encouraging business owners to spend as much as possible and decrease revenue as the year is wrapping up. Here's my professional opinion on that statement- What a Load of Crap! Yes, we all want to pay the least amount of tax as possible, but wouldn't you rather have the after-tax cash than no cash at all? You should never want to make business decisions solely based on saving on taxes. As my CFO friend Philip Campbell says, "the term write-off turns smart people into horrible decisions-makers."
My advice (it's free advice so it may just be worth what you paid for it), make spending decisions based on operations. Will the purchase make you more profitable, more efficient, or above all else, does it help you reach your quarterly priorities, annual goals, or 3 year vision?* If the answer is no, then don't make the purchase.
(*If you don't have quarterly priorities, annual goals, or a 3 year vision you need to take the time to do so and figure out where you want to take your business)