Have you ever thought about the saying, “To make money, you need to spend money?” At its core, it is more honest than any textbook or lecture or market analysis: you cannot expect to attract new clients without spending money. I’m not talking about spending 50% of your revenue on launching a huge, flashy advertising campaign. When I talk about spending money, I am referring to strategically investing in the future of your business. You’re a financial advisor, you want to run a successful business and you want to make money. I’m here to help you do all of those things.
Before you get nervous, let’s take a step back and look at how spending money can be “less scary.” In speaking with financial advisors, I hear them say that they do not want to incur additional expenses to bring on new clients because of two primary reasons:
- They are unsure about the potential return from investing in sales and marketing
- They don’t want to reduce their current profit.
While these concerns are valid and demand a whole blog entry of their own (stay tuned), let’s focus on the root of the issue: tracking your financials.
How can I convince you that to make money you need to spend money? It starts with a simple tool: a journal of accounts. Whether you use a spreadsheet to track your expenses or QuickBooks, you can use a journal of accounts to improve your financial reporting. In most cases, I hear that financial advisors are only using financial reports to calculate what they owe to the government for taxes at the end of each year. Why not get more out of your reports? A journal of accounts will help you do so.
Recently, I began working with a financial advisor who wanted to track the net income he receives from each of his four different lines of business: selling commission-based products, selling fee-based products, acting as an OSJ (Office of Supervisor Jurisdiction), and coaching advisors on their businesses. He is systematic in his approach to financial reviews and has each of his employees follow a disciplined process for executing operations.
Using a spreadsheet, the financial advisor has tracked revenues from each of his lines of business. However, he had not aligned the expenses associated with each category. By creating a journal of accounts as I recommended, he has already identified where he can make better decisions about allocating his time and money to grow his business.
Likewise, a frequent and disciplined review of your financial condition will provide you with useful information to identify trends and make better decisions about how best to invest your money.
The first step in creating a financial review process is creating a journal of accounts, which starts by numbering each of your financial accounts. Businesses with a dedicated accounting department have categorized financials as such for years. If they can benefit from the simplified reporting, so can you!
Let’s start with the balance sheet. As you will see in the AUMinaBox.com Journal of Accounts spreadsheet (download below), which you can use to create your own journal of accounts, your first item is cash. Every category has a number. I recommend starting with the number 1000, so cash would be written like “1000–Cash.” As you move down the balance sheet, you move up in number. For accounts receivable, the next category after cash, you would use “1010–Accounts Receivable.” Below are more specifics on the remaining categories in the balance sheet:
- Most advisors do not have many fixed assets, unless you own a building. Computers and office equipment are a necessity and can be listed as “1020–Computer/Office Equipment.” Furniture is listed as “1030–Furniture.” You may have additional entries as well, which should be numbered 1040 and so forth.
- Moving on to liabilities, I recommend starting with credit cards, which would be listed as “2010–Credit Cards.” Employees’ payroll can be listed as “2020–Payroll.” If you happen to have debt, debt can be separated as “2030–Debt.” If you have other entries, you can add to the numbers as outlined in the Journal of Accounts spreadsheet (download below).
- To finish off the balance sheet, shareholders equity is listed as “3000–Shareholders Equity.”
Moving to the income statement, we start with revenues and move to expenses. Below are a few more specifics about the income statement categories:
- Sales are listed as “4000–Sales.” If you receive a commission form an insurance firm, this can be listed as 4010. Fee based income is a separate item like 4020.
- Cost of sales is the direct expenses incurred, such as your salary and fees to people paid in soliciting for you. These expenses would be “5010–Financial Advisor’s Salary” and “5020–Referral Fees,” respectively.
- Moving to operating expenses, you would include employees’ salaries and wages, software and computers, travel, general office and administration. These entries are numbered “6010–Salaries and Wages,” “6020–Software and Computers,” and so forth.
- General office and administrative expenses as well as taxes are given their own category number given their significance: “7000–General Office and Administration” and “8000–Taxes.”
Download the Journal of Accounts spreadsheet below to use as a tool for creating this report.
Once you have gone through this exercise, you have completed your journal of accounts. Your accountant or bookkeeper could also create a journal for accounts. Either way, it will make monitoring and communicating about your financials much easier.
Now that you have a journal of accounts, you can more carefully scrutinize your financial reports. What is making money, what is not and where are your biggest costs?
You will be better able to make profitable business decisions and identify trends that develop over time. Essentially, you will know how to spend money to make money.
Homework: Fill out the Journal of Accounts spreadsheet and start putting it to use! Start from scratch or use the Journal of Accounts spreadsheet to create each financial entry you use and tie a number to that entry.
Simply fill out the below form to download the Journal of Accounts spreadsheet.