Mr Davidson has worked over many years with Financial Planning firms and helped them to assess their own business efficiency and make improvements where needed.
In this Technical Update feature for Financial Planner he looks at financial effectiveness, management effectiveness, marketing effectiveness and team effectiveness.
He shares some of his thoughts on these key
business measures and also offers some ways to define and measure them.
He covers area such as profit margin, client proposition and marketing, team management, communications and many other key areas.
To suggest ideas for Technical Update email editor Kevin O'Donnell at
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Here is a list of the Top 10 measures to assess your business effectiveness. I've broken them down into four key areas:

• Financial effectiveness
• Management effectiveness
• Marketing effectiveness
• Team effectiveness

Let's look at them one by one:

Measures of Financial Effectiveness
1. Gross profit margin
If you don't have a suitable level of gross profit margin you have no chance of ending up with any net profit.
Turnover – Direct expenses* = Gross profit
*Direct expenses is all the remuneration paid to advisers and directors that sell to clients. If the directors take minimal drawings insert a figure they actually take at years-end or insert a figure that is a fair market salary for the selling directors. The same applies to anyone using a LLP structure. Put in an appropriate market salary figure as a direct expense for partners. If you do not do this you will get inflated gross and net profit margins, which are not a true reflection of how your business is performing.
The money paid to sales people, selling directors and introducers or referrers is paid from the gross revenue of the business. It's only from what's left after these payments that the business can pay it's other overheads (such as rent, wages for all other staff, other operating expenses and so on). Paying away more than 40 per cent of your gross revenues will leave you severely profit- squeezed if you are not careful. In a lot of firms self-employed advisers get paid 50 to 60 per cent of gross revenues that they bring in. This is not sustainable and is often a contributing factor to poor net profitability for the owners.
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2. Total Overhead Percentage
Overhead is all other costs of running your business after direct expenses. This percentage is critical. If you don't manage your overhead costs you could also end up with poor net profit levels.
Total Expenses – Direct Expenses = Overhead
And:
Overhead/Total revenue = Overhead percentage

If this figure is higher than 35 per cent it may point to poor business processes and/or overstaffing within your business.
3. Net Profit Margin
Net profit is what is left after direct expenses and overhead are paid. This is the owner's reward for the risks of running a business (over and above their market salary or drawings, which are fair reward for the job they perform within the business).
Good performance within an advisory firm is a 25 per cent net profit margin. High performance firms can even exceed this. Sadly, many UK firms do not hit this basic profitability level after the owners take a fair market salary (that is, what they could be paid if they took a job down the road with one of their competitors).
Turnover – Direct Expenses – Overhead = Net profit
And therefore,
Net profit/Turnover = Net Profit Margin
Monitoring and managing to these three high level indicators of business performance will go a long way to getting things in good order in your practice.
Measures of management effectiveness
4. Regular and Effective Internal Comms.

Effective businesses focus on internal communication every bit as much as the external communication they deliver to their clients. Herb Kelleher, the founder and former CEO of Southwest Airlines, is quoted as saying that his priorities in order were:
a) Staf f
b) Customers c) Shareholders
Herb's point was that happy staff create happy customers which create profits and happy shareholders.
In a Financial Planning firm the work you do changes people's lives for the better. Yet often your team are the last one's to hear some of these amazing life changing stories. Great firms understand that the team are the first people that need to hear the good news on a regular basis and so they hold regular meetings not just to deal with 'problems' but to tell everyone the good that the firm has done lately. Others have an internal newsletter that spreads the good news while also featuring the great work that individual team members have done to deliver it.

5. Appointment of Professional Management
Once a firm gets to around £700,000 of turnover professional management needs to be appointed. That could be an operations manager role or it could be a bona fide general manager or CEO appointment.
There comes a time in every firm's development where the owners need to decide what they love and what they are good at and focus on those activities. Day to day decisions on the colour of the carpet, or choosing the telephone and technology, need to go elsewhere. Often the founders are great technicians but not necessarily great business managers. Bringing in a professional manager can be a real catalyst for growth.

Measures of Marketing Efficiency

6. Clear target market and service proposition
It almost goes without saying that a business must know exactly who it works with and in small businesses focus, focus, focus is the key. The narrower the business can focus its efforts the more successful it can become.
While this often starts with vague descriptors or minimum assets under management or socio demographic profiles (for example retirees) it needs to get narrower and narrower as the firm finds itself better able to define the characteristics of its specific target market.
We are seeing good examples in firms like Wealth Matters who focus on serving the contractors and freelancers market or Anita Gatehouse at cre8 Wealth Management who has specialised in the widows market.
Once you know precisely who you serve it is much easier to get your marketing story, service proposition and business processes geared up to deliver.

7. Client Communication
Regular and high quality client communication is a key component of an effective business. The ideal is to be 'touching' your best clients more than 12 times per year using a mix of, telephone, email, newsletter, text, social media, client seminars and events, face-to-facemeetingsandsoon.
Most firms hold an annual review meeting face to face and expect that to carry the day, but it doesn't. Firms that have a well structured high quality communications programme generate much higher levels of client referral. It's strange that most firms say that client referral is their number one source of business and yet do nothing to till the soil in this area.

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8. A Strong 'Why'
Simon Sinek's book 'Start With Why' provides some fabulous examples of the importance of knowing your 'Why' and also what happens when once great businesses lose sight of it and start focusing on their 'What'.
Great Financial Planning firms often have a strong 'Why' built into them but it doesn't hurt to get this as clear as possible so that it can shine through in everything that you do. Get some professional help if necessary to sharpen this up.
A strong 'Why' helps clients that believe what you believe find you and engage with you. Let's be honest, there are a lot of good Financial Planning firms out there that to the untrained eye appear to do what you do; you are already commoditised even though you believe you are different. Communicating the things you believe
in via blogs, articles, newsletters and seminars helps people understand your views and beliefs in a much deeper way, allowing them to self select if they think they are right to work with you. This is the easiest, most enjoyable and most effective form of marketing in my opinion.

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Measures of team efficiency
9. The right team
No business can perform unless it has the right team in place. If any one person can't perform their role satisfactorily work bounces around the business or gets pushed back up to the top. Either way it is hugely frustrating for everyone involved and leads to unnecessary delays on the processing of work, which must also affect your bottom line.
Smart business owners ensure that the team works for them, rather than them working for their team. Seems obvious, but a lot of owners end up fixing the problems of team members after hours while the team member leaves on the dot of 5 o'clock. The directors or partners are also the first ones to take a pay cut in a downturn while the staff continue to draw their remuneration regardless.
With the right team assembled and suitable levels of business profitability, these unsatisfactory outcomes and the resentment they generate can be avoided.
10. Personal Development Plans for Everyone
In effective firms everyone has a personal development plan in place; a three-year plan for how they get better.
Creating and executing these plans requires a significant commitment from the business and the team members themselves. This level of commitment usually generates two outcomes
a) Greater buy in to the business and their career from some team members
b) A swift exit for others that don't really want to work to get better and grow. Either one is ok.
If you are struggling with this area get some professional HR support. It's not expensive and can really pay you back.
Conclusion
Business is like a jigsaw puzzle, with lots of pieces that have to fit together perfectly to create your vision. Focusing on these top 10 measures of business effectiveness can provide a great place to focus your time and effort.