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Is your practice making money? You’d be surprised at how many advisors can’t answer that question. Yet if you don’t know how much your operations cost, you might hire staff or purchase a book of business without being able to truly afford it. On the flip side, if your profits are flagging, you’ll need to modify pricing accordingly.

Trouble is, “Most advisors don’t have a good system for accounting,” says Mark Tibergien, CEO of Pershing Advisor Solutions, Jersey City, N.J. “They have too much detail and can’t make objective judgments.”

Not knowing the bottom line means that line ultimately suffers. “The average practice’s gross profit margin has dropped to 55%, and overhead expenses risen to 45%,” says Tibergien. “That’s only 10% operating profit.”

If your gross profit margin is declining, there are four reasons:

  1. Poor pricing: You’re not charging enough.
  2. Poor productivity: Not enough revenue per client or staff member.
  3. Poor product and service mix: Too many services don’t resonate with clients or make money.
  4. Poor client mix: You’re investing too many resources in the 80% of clients who provide only 20% of revenue.

Two more elements drive down profitability at the operating level:

  1. Low volume
  2. Poor cost control

The biggest cost is people, so advisors often cut staff to increase profit, says Tibergien. Yet that affects productivity, the service experience, and prospecting abilities. Another mistake is not determining the new breakeven point after incurring a new cost, like a rent increase. Yet that’s impossible if you don’t know your profitability.

So how do you calculate the numbers? Four advisors share their costs and how they translate to what they charge clients.

The professional services advisor, Cynthia Kett

The bank advisor, Alex Bird*

The equity owner, Mark Farris

The independent, Rod Tyler

Plus, be sure to check out Other ways to calculate costs

Originally published in Advisor's Edge