Why You Need More Than Just Revenue Goals
It’s July. What does that mean to you? For some, it’s the start of a new financial year; for others it’s the half-way mark. Either way, now is a good time to revisit your goals and objectives.
It’s easy to get caught up in the day-to-day running of your business, particularly during the times you’re experiencing high volume, and major transactions. Most professionals understand and appreciate the importance of goal setting and planning. Unfortunately, many interpret this as little more than reviewing the previous year’s results, and projecting forward into next year.
Some firms might surpass their previous results, but still have declining profitability and little to no improvement in long-term value. Top performers understand that in order to produce superior growth results – and do it consistently – they need to implement of variety of tactics during the year.
As you establish and/or update your plans, here are several metrics to consider:
Employee Productivity Goals
- Total number of employees (FTE) — the total number of full-time equivalent employees, including owners, directors and principals
- Revenue per employee — net revenues divided by the total number of FTE employees
- Compensation per employee — total compensation divided by the total number of FTE employees
- Spread per employee — total revenue per employee minus compensation per employee. While revenue per employee is a standard for measuring productivity, the ‘spread’ measures the dollars per employee available to pay all other business expenses, and to generate a profit for the firm.
Financial Stability Goals
- Tangible net worth — total assets minus intangible assets equals total tangible assets. Total tangible assets minus total liabilities equals tangible net worth. This represents the net value of the corporation, were it to be liquidated. A low or negative tangible net worth negatively affects a firm’s ability to invest in new opportunities, develop new products, hire new employees, make other capital expenditures, and handle stockholder redemption obligations.
- Current ratio — current assets divided by current liabilities. A current ratio greater than 1:1 indicates that cash and assets with short-term maturities are sufficient to meet a firm’s short-term obligations.
- Receivables/payables patio — accounts receivable divided by accounts payable. This ratio measures the collection practices of a firm; a lower ratio represents more timely collections of the amounts due from clients
- Aged receivables — measures the length of time that receivables are past the due date (over 60 days, over 90 days). Receivables aged greater than 60 days tend to have a magnified impact on the firms liquidity, depending on when payments are due to suppliers (insurance companies). This can force a firm to use its own funds to pay suppliers.
- Pre-tax profit/loss — net revenues minus total expenses.
- EBITDA — Earnings Before Interest, Taxes, Depreciation, and Amortization. The firm’s profits before interest, taxes, depreciation and amortization expenses are included.
Producer Profitablity Goals
- Validated producers — producers whose books of business are sufficient to cover their wages under the firm’s commission formula.
- Unvalidated producers — producers whose production does not yet cover their wages under the firm’s commission formula.
- NUPP — Net Investment in Unvalidated Producer Pay. This is expressed as a percentage of net revenue; the NUPP is the difference between what an agency pays its unvalidated producers and what the producers would earn under the firms normal commission schedule.
Production Effecicney Goals
The percentage of time employees spend on:
- Personal Training, Education and Professional Development
- Soliciting new business
- Management, Personnel and Administration
- Servicing existing accounts
Total Revenue Goals
- Renewal Revenues- presented as a percentage of prior year’s total revenues. This figure is affected by attrition (loss or retention of accounts), and by changes in premium and commission levels. The higher the percentage, the more favourable the result.
- New Business- presented as a percentage of prior year’s total revenues. The higher the percentage, the more favourable the results.
- Acquired Revenues- presented as a percentage of the previous year’s total revenues. The percentage indicates the significance of acquired business.
- Organic Growth- represents growth in revenues from the previous year, excluding acquired revenues.
- Total Growth- represents growth in revenues from the previous year, including acquired revenues.
My recommendation is that you present this information, in table form, over a three-year period. If you use just a few of these metrics, you will be equipped with valuable information, to put you in a much stronger position to establish the right strategies, goals, and tactics, as you plan the year ahead. The goal of increasing the percentage of full-time clients (cross-selling), for example, will improve organic growth, employee productivity, and profitability.
It’s important to have the ability to measure the right things, and to see clearly what needs to be done in your business during the year to do it. Achieve this and you will be well ahead of the competition, and on your way increasing the long-term value of your business.