by Tony Vidler
How’s this for an uplifting thought: Each year your first priority in terms of revenue production is to get back to where you are now.
That’s right…the first target is to get to “zero growth”.
No matter how good you are, and no matter how WOW your service levels are, clients will leave you.
Clients WILL disappear….Everyone knows it will happen, but most professionals are not sure how fast it will happen.
It is a sad fact of life that people get ill or die, divorce or change business interests, move cities and countries….it is just a part of the landscape that clients circumstances will change and at some point they do not need the advice or the product solutions that you have been providing.
It is nothing personal, it is just business. You provide business they no longer need, or they now need it from someone else, somewhere else.
The typical natural attrition rate on a financial services book of business is around 5-6% per year.
That is the proportion of clients whose circumstances have changed typically, and they cease their business relationship with you despite your fabulous service and advice. That is a fairly hefty hit on the residual income stream the business has been building up, and of course this natural attrition becomes one of the primary motivators for seeking new clients and new business continually.
There is nothing surprising in that for seasoned practitioners perhaps, however despite the knowledge that a proportion of clients and recurring revenue will be lost each year, it seems to be rarely factored into the business planning process. Gross revenue targets are established for the business, and a plan of sorts for achieving the new business levels required for the growth is developed. And then despite the best efforts of the entire firm, they often undershoot the goal because they forgot to take into account the fact that some clients were going to leave.
There are 3 elements to establishing and then hitting the right growth target:
1. Replacing anticipated lost customer value (so effectively planning to get back to where you are already), and,
2. Building in an allowance for inflation-driven cost increases
3. Generating the required return that stakeholders expect from the business.
Every professional can do the maths, it is just forgotten a lot of the time in the planning process. If I lose 5% of my clients/income, then I need an increase of 5.3% basically to get back to where I was.
When thinking about your business planning begin with understanding what the “zero growth” number is for your firm. It will vary a little from one professional services firm to another depending on the types of clients and demographics they are working with, but there will be a natural attrition rate for each firm. Working out what that rate is, and therefore what rate of business growth is required each year just to maintain the status quo.
Maintaining the status quo does of course mean that existing infrastructure and overheads are retained….and as a rule their cost can be expected to rise broadly in line with inflation regardless of how well your business is performing.
Great…now I need 8-9% growth in revenue just to be where I was…..
It’s a little like the “Tax Freedom Day” concept isn’t it? You have to work until late April each year to generate your share of the tax take (In Australia for example), and then from May onwards you are earning money for yourself. For a firm to generate a consistent increase of even 10% p.a. for stakeholders the gross revenue growth needs to be something closer to 20% p.a. Setting a target of a modest 10% gross increase is usually a gain of next to nothing in real terms.