PROFITABILITY RATIOS ! Gross profit margin (Gross profit ÷ total revenue) × 100% = gross profit margin ( ÷ ) × 100% = ! Operating profit margin (Operating profit ÷ total revenue) x 100% = operating profit margin ( ÷ ) × 100% = ! Overhead percentage (Total overhead ÷ total revenue) × 100% = overhead percentage ( ÷ ) × 100% = ! Average total income per owner (Owner’s base draw + operating profit) ÷ no. of owners = average total income per owner ( + ) ÷ = PRODUCTIVITY RATIOS ! Revenue per professional Total revenue ÷ no. of professionals = revenue per professional ÷ = ! Revenue per staff Total revenue ÷ no. of total staff = revenue per staff ÷ = ! Clients per professional Total clients ÷ no. of professionals = clients per professional ÷ = 218 WORKSHEET 9 Calculations for Ratios Source: © Moss Adams LLP ! Clients per staff Total clients ÷ no. of total staff = clients per staff ÷ = ! Operating profit per professional Operating profit ÷ no. of professionals = operating profit per professional ÷ = ! Operating profit per staff Operating profit ÷ no. of total staff = operating profit per staff ÷ = CLIENT-SELECTION RATIOS ! Revenue per client Total revenue ÷ no. of clients = revenue per client ÷ = ! Assets under management per client Assets under management ÷ no. of clients = assets under management per client ÷ = ! Gross profit per client Gross profit ÷ no. of clients = gross profit per client ÷ = ! Operating profit per client Operating profit ÷ no. of clients = operating profit per client ÷ = C ALCULATIONS FOR R ATIOS 219 ACCOUNT ITEM 1 Net income after tax 2 Depreciation and amortization 3 +/– Changes in accounts receivable 4 +/– Changes in inventory 5 +/– Changes in other current assets 6 +/– Changes in accounts payable 7 +/– Changes in accrued expenses 8 +/– Changes in income tax payable and deferred taxes 9 +/– Changes in other current liabilities 10 +/– Changes in other noncurrent liabilities 11 Operating cash flow (OCF) 12 +/– Changes in marketable securities 13 +/– Changes in long-term investment 14 +/– Changes in gross fixed assets 15 Nonrecurring gain (loss) 16 +/– Changes in intangible and other noncurrent assets 17 Investing cash flow (ICF) 18 Cash flow before financing (sum 11 and 17) 19 +/– Changes in short-term bank debt 20 +/– Changes in long-term bank debt 21 +/– Changes in subordinated debt 22 +/– Changes in capital stock 23 – Dividends paid 24 +/– Adjustments to retained earnings 25 +/– Changes in minority interest 26 Financing cash flow (FCF) 27 Total cash flow (sum 11, 17, and 26 ) 220 WORKSHEET 10 Cash Flow Calculator Index accounting accrual, 146 cash-basis, 145–146 fundamentals of, 137–138 Accredited Investors, 25–26, 39–40 accrual accounting, 146 administrative staff, use of, 54–56 Advisor Impact, 5, 39, 40, 56 Client Audit process, 43, 45, 46 advisory firms, top challenges facing, 6–7 affiliation model, 66–70 American Express Financial Advisors, 68 American Marketing Association, 46 Applied Business Solutions, 16 assets current, 140 f ixed, 140 –141 Atlas Shrugged (Rand), 95 Bachrach, Bill, xiv, 23 balance sheets analysis of, 162–168 description of, 139–143, 214–215 Balasa, Mark, 15–16 BAM Advisor Services LLC, 68 base pay, 117–118, 120–124 benchmarking compensation, 121–124, 212–213 hiring employees and, 86–88 Beyond Survival: A Guide for Business Owners and Their Families (Danco), 7 bonuses and incentives, 118–119, 124–128 Boston Private, 24 Bowen, John, xiv break-even analysis, 159 Bruckenstein, Joel, xv, 4, 54 capabilities (core) perspective, 23 cash-basis accounting, 145–146 cash flow calculator, 220 cash flow statements analysis of, 168–169 description of, 146–148 CEO, hiring a, 104 common mistakes, 105–109 CFA Institute, 151, 152 Christopher Street Financial, Inc., 17–18, 45 client analysis of, 26–27, 194–197 demands, 2–3 entrepreneurs and relationships with, 56–58 satisfaction affected by growth, 60 selection ratio, 219 surveys, 39–47 Client Audit process, 43, 45, 46 Collins, Jim, 185, 186 common sizing, 160 221 compensation base pay, 117–118, 120–124 benchmarking, 121–124, 212–213 benefits, 119 bonuses and incentives, 118–119, 124–128 commission-based/variable base pay, 117–118, 120 fixed pay, 117, 120 long-term wealth-building, 120, 127–128, 129–136 owner’s, 128–129 perquisites, 119–120 compensation plans affordability issues, 115–116 common mistakes, 111–112 developing, 112–117 establishing incentive, 124–128 reinforcing behavior with, 115 staff expectations, 116–117 strategic alignment and, 113–115 competition perspective, 23 training staff that becomes your, 60–61 costs creeper, 160 growth and, 59–60 Covey, Stephen, 186 Dalbar, 43 Danco, Leon, 7 DataLynx, 68 debt, long-term, 142 debt-to-equity ratio, 166–167 DESCO model, 102 Dinverno, Armond, 15–16 diversification, 19, 21 Drucker, David, xv, 4, 54 employees. See staff E Myth: Why Most Businesses Don’t Work and What to Do About It, The (Gerber), 3 E Myth Revisited: Why Most Small Businesses Don’t Work and What to Do About It, The (Gerber), 72 ensemble practitioners, versus solo practitioners, 51–54 entrepreneurs common characteristics, 51 difference between self-employed and, 49–50 efficiency limitations, 54–56 growth, dealing with, 50–51, 59–61 solo versus ensemble practitioners, 51–54 time spent with clients, 56–58 equity, 142, 167–168 equity-type offerings, 120, 127–128, 129–136 evaluation, strategic plans and, 29–33 expenses direct, 144 overhead, 145 fees, margin squeeze and, 5 Fidelity Registered Investment Adviser Group, 68 financial analysis of balance sheet, 162–168 of cash f low statement, 168–169 of income statement, 151–162 process, 150 financial-impact analysis, 169–170 Financial Planning Association (FPA), 52, 55 Compensation and Staffing Study, 66, 72, 77, 104, 121, 122–123, 151, 152, 169, 178, 212–213 financial statements balance sheets, 139–143, 214–215 cash flow statements, 146–148 222 I NDEX income statements, 143–145, 216–217 focus, developing, 26–29 Gerber, Michael E., 3, 72 Gluck, Andy, xv Good to Great: Why Some Companies Make the Leap . and Others Don’t (Collins), 185, 186 gross profit, 59, 144 margin, 152–158 growth rates factors affected by, 59–61 handling slower, 1–2 Robert Half & Associates, 161 Hambrick, Donald, 106 Harvard Business Review, 41–42 Hatch, Jennifer, 45 Heupel, Will, 25–26 Hutch Group example, 75–77 incentives, 118–119, 124–128 incentive stock options (ISOs), 130–132 income statements analysis of, 151–162 description of, 143–145, 216–217 Inside the Family Business (Danco), 7 job descriptions, 77–81 joint ventures, 173–176 Katz, Deena, xiv Kochis Fitz, 18 Kohn, Alfie, 97 Kolbe™, 102, 103 leveraged model, 63–66 Levin, Ross, 25–26, 39–40 liabilities, 142 Littlechild, Julie, 56 long-term wealth-building, 120, 127–128, 129–136 management aversion to, 3–5 growth and lack of control by, 60 marketplace perspective, 22–23 market rate, 121 Merrill Lynch, 66 models affiliation, 66–70 leveraged, 63–66 multidisciplinary, 62–63 Moeller, Steve, xiv monitoring, strategic plans, 35–37 Morgan Stanley, 66 Moss Adams LLP, 16, 40, 45, 72, 77, 104 multidisciplinary model, 62–63 Murray, Nick, xiv Nadler, David, 106 Navigating Change: How CEOs, Top Teams, and Boards Steer Transformation (Hambrick, Nadler, and Tushman), 106 niche firms, 17–18 Nixon Peabody Financial Advisors (NPFA), 24 nonqualified stock options (NQSOs), 129–130 Northwestern Mutual, 67 operating profit, 59, 145 margin, 158–159 organizational culture, 98 owner compensation, 128–129 ownership, return on, 161–162 Pareto constant, 156 performance evaluation worksheets, 201–211 I NDEX 223 performance expectations, of employ- ees, 81 performance shares, 135–136 perspectives, 22–24 phantom stock, 132–133 PILLAR, 89–90, 208–211 practice acquisitions, 177–181 practice life cycle, 7–11 practice-management assessment, 190–193 Practice Navigator™, 25 Principle-Centered Leadership (Covey), 186 productivity analysis, 171–172 productivity ratio, 218–219 Prof ile™, 102, 103 profit, operating versus gross, 59, 144, 145 gross margin, 152–158 operating margin, 158–159 profitability ratio, 218 Punished by Rewards: The Trouble With Gold Stars, Incentive Plans, A’s, Praise, and Other Bribes (Kohn), 97 quality control, growth and, 60 Rand, Ayn, 95 ratios client-selection, 219 debt-to-equity, 166–167 productivity, 218–219 profitability, 218 Rattiner, Jeffrey, xiv Raymond James Financial, 68 referral agreements, 173–176 restricted stock, 133–134 return on ownership, 161–162 revenue, 143 Risk Management Association (RMA), 151 Rowland, Mary, xiv Frank Russell Co., 68 safety, 166 –167 Sand Hill Advisors, 24 Charles Schwab & Co., 68 Securities Industry Association (SIA), 151 SEI Investments, 68 self-evaluation worksheet, 198–200 solo versus ensemble practitioners, 51–54 solvency, 164–166 Spain, Caryn, 16, 22 specialist firms, 17, 18 staff aligning business strategies with, 73–77 benchmarking and hiring, 86–88 CEO, hiring a, 104–109 compensation and expectations of, 116–117 evaluating, 90–94 Hutch Group example, 75–77 job descriptions before hiring, 77–81 managing difficult, 99–104 performance expectations, 81 problems with recruiting and retaining, 3, 72–73 retaining, 96–98 selecting, 82–85 staff development appraisal process, 90–94 coaching and continuous, 94–95 stock appreciation rights (SARs), 133 stock options, 120, 127–128, 129– 136 stock purchase plan, 134–135 Strategic Insights: Decision-Making Tools for Business Leaders (Spain and Wishnoff), 16 strategic planning defined, 13–16 224 I NDEX differentiators, 17 evaluation, 29–33 execution of, 33–35 focus, 26–29 monitoring, 35–37 process, 16–37 questions to ask, 44 vision, 16–26 success, personal definition of, 23–24 Sullivan, Dan, 6, 23 surveys caution when using, 46–47 costs of, 42–43 how to get constructive responses, 42–45 opposition to, 40 professional services, use of, 43 value of, 39–40, 41–42 written versus telephone, 42 SWOT analysis, 29–33 tax management, 146 time, managing, 5–6 Tregoe and Zimmerman, 16 trend analysis, 160–161 Turner, Dale, 183, 184 Tushma n, M ichael, 106 Veres, Bob, xiv Vessenes, Katherine, xiv Virtual-Office Tools for a High- Margin Practice (Drucker and Bruckenstein), xv, 4, 54 vision, developing, 16–26 Wachovia, 67 War for Talent, The, 101 T.D. Waterhouse Institutional, 68 Wealth Management Index™, 26 Welch, Jack, 184 Wells Fargo, 67 Wishnoff, Ron, 16 work in process, 141 workplace creating the, 96–104 managing difficult staff, 99–104 organizational culture, 98 I NDEX 225 Mark C. Tibergien is a principal at the accounting firm Moss Adams LLP in Seattle. He is partner in charge of the Business Consulting Group for the firm, chairman of the Securities and Insurance Niche, chairman of the Business Valuation Niche, and a past member of the firm’s executive committee. He has been working with public and private companies on matters related to business management, suc- cession planning, and strategy formulation since 1973. Mr. Tibergien has a particular expertise in consulting on manage- ment issues within the financial-services industry, having consulted with hundreds of broker-dealers, financial advisers, investment manag- ers, insurance companies, and other financial-services organizations in the United States, Australia, and Canada. He served as president of the Western Washington chapter of the International Association for Financial Planning (IAFP) (now the Financial Planning Association), chairman of the Northwest Regional Council of IAFP, and an elected member of the IAFP National Executive Committee. As a nationally known adviser, speaker, and workshop leader within the securities and insurance industries, Mr. Tibergien delivers between fifty and sixty presentations to industry conferences each year on topics related to strategy, industry trends, practice management, and merg- ers and acquisitions. In 1996, the Washington Society of CPAs rec- ognized him as the “outstanding instructor of the year.” Every year since 1999, Accounting Today has recognized him among the “100 Most Influential” in the accounting profession. In 2003, Financial Planning magazine and Financial Planning.com named him as a “Mover & Shaker” in their annual review of industry professionals, and in 2002 and 2003, Investment Advisor magazine rated him among the “25 Most Influential” in the financial-services industry. Mr. Tibergien was president of Management Advisory Services before it merged with Moss Adams in January 1994. He was a vice president of Willamette Management Associates, an investment- management and business-valuation firm headquartered in Portland, Oregon, and a writer for Investment Dealers’ Digest in Chicago. He received his education from Bay de Noc College and the University of Wisconsin, Stevens Point. Readers may contact the author at mark.tibergien@mossadams .com. About the Authors Rebecca Pomering is a principal at the accounting firm Moss Adams LLP in Seattle and specializes in management consulting to the financial-advisory industry. Since joining Moss Adams in 1997, Ms. Pomering has provided consulting services to financial- advisory firms, broker-dealers, and independent trust companies on issues of business management, compensation, and organizational design. She is a certified Senior Professional of Human Resources and the head of Moss Adams’s compensation consulting practice as well as a key member of the Moss Adams Securities & Insurance Niche consulting team. Her work in this industry focuses on stra- tegic planning and consulting on issues related to compensation, practice management, organizational effectiveness, and succession planning. Ms. Pomering manages more than a dozen annual industry research and benchmark projects on compensation and oper- ating performance, including the Financial Performance and Compensation studies for the Financial Planning Association, the Broker-Dealer Financial Performance and Compensation studies for the Financial Services Institute, and the Million Dollar Round Table “Top of Table” operating performance study. She has been engaged as a speaker on financial-services-industry topics for such organiza- tions as Schwab Institutional, Fidelity Investments, Raymond James Financial Services, Macquarie Bank, SEI Investments, American Express, ING Network, Alliance Bernstein, Columbia Funds, Financial Services Institute, and the Financial Planning Association and has coauthored articles published in the Journal of Financial Planning and other industry publications. Ms. Pomering is an elected member of the Financial Planning Association’s national board of directors. Before joining Moss Adams, she was the assistant controller at Thomas Kemper Soda Co. and an investment assistant with Franklin Financial Planning. She received a BS in finance and accounting from the University of Illinois, graduating magna cum laude. Readers may contact the author at rebecca.pomering@mossadams .com. . PILLAR, 89–90, 208–211 practice acquisitions, 177–181 practice life cycle, 7–11 practice- management assessment, 190–193 Practice Navigator™, 25 Principle-Centered. accrual, 146 cash-basis, 145–146 fundamentals of, 137–138 Accredited Investors, 25 26, 39–40 accrual accounting, 146 administrative staff, use of, 54–56 Advisor