True Story: Don’t Stash Your Profit-Loss Statement Under the Mattress

Jennifer Goldman Consulting True Story Don’t Stash Your Profit-Loss Statement Under the Mattress

Why is it that advisors tell clients not to stash money under their mattress or bury it in their back yard? Risk. Risk from fire, flooding, natural disaster, theft, and of course, inflation.

In a related way, not running your company’s profit-loss (PL) projection is just as risky. In fact, probably more so. Just because you don’t look at the numbers, doesn’t mean they aren’t there. What comes in, comes in and what goes out, goes out regardless of whether you track it or not.

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But, one day, you may wake up to find your numbers aren’t viable and you can’t afford to run your business or pay yourself what you are worth anymore.

In reality, advisor-owners don’t often notice that there is a leak in their ship until it is sinking. Sometimes, there is enough time and barely enough revenue to recover. Others don’t get so lucky. Here is a true-life story to explain.

True Story: $180 million AUM Southwestern planning and investment RIA firm of 13 team members—6 advisors (includes 2 owners), 1 associate advisor, and 6 support staff—unknowingly operating at 1% profitability for years and faces a slow shutdown or fire sale.

The egregious business planning error made with this firm is simple: there was zero financial accountability.

For years, zero profit/loss data was neither projected nor shared with other executives. No one knew what the firm was projected to make nor the impact of changes on the bottom line. In essence, there was no forward planning on future expenses or revenue growth. Not surprisingly, the dismal state of their finances wasn’t discovered until other problems started popping up in the firm.

First, they began losing clients (and not to death). Then, with an associate advisor and a staff member on the brink of leaving this stagnant firm, the owners found they couldn’t afford to pay fair market value for replacement staff. To top it off, they weren’t bringing in new business and had insufficient funds to energize their marketing without reducing compensation. The stark reality forced the majority owner to blend into a  RIA conglomerate, hand over control, and lay off more than half the staff.

The question that begs to be asked is this: at what point does this firm pass the point of salvageability? And then what do you do? From a number’s perspective, this firm would have a remarkably low valuation for buyout. And with the average age of the clientele being 65, who would want to buy it?

Accountability is the name of the game. A living, breathing profit-loss projection is what gives clarity to a firm’s priorities and where they may be out of sync with the company’s ability to prosper. With these numbers in hand, majority and minority owners can hold one another accountable. If this had happened, they may have been able to stop hemorrhaging their profits sooner and thrive.

The bottom line: when you aren’t doing honest projections about your firm’s financials and tracking them quarterly, you are simply avoiding the honest truth about the health of your firm. One day, the financial health of your firm may be too far gone to revive.

Interested in learning more about using a profit-loss projection to do your 1-year Business Projection? Read this month’s article, The Importance and Easy Steps to Proactively Managing your Business Finances and stay tuned for next month’s article on the 5-Year Business Growth Projection.


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