Assuming you are making financial projections regularly for the professional services business you own and manage, should you project an increase, no increase, or less every year? Most entrepreneurs have a habit of projecting higher revenue year on year. It makes sense: they want their business to grow. Get somewhere. That was the main motivation to set up the business.
Projecting less – that is unthinkable, right? How can you plan to make less than you made last year? Well…
What is your percentage of growth over the last couple of years? Has your revenue grown, plateaued or gone down? If it grew, where from? If it went down, what happened? Which clients left you for greener grass?
And what happened to your profit over the last couple of years in relation to your revenue? Has it gone up, stayed the same or decreased?
We don’t believe in leaps forward, year on year, ad infinitum. The patterns of your previous years can tell you what you could expect in the future. And you might also want to slow down and consolidate.
Here are a couple of measures to look for in your data:
Real profit –if you and your business partners work in the business full time and you pay yourself and your business partners fully or partially through dividends, that is pay for work. Put it all down, along with associated tax if any, then calculate the profit.
Now use your total pay, whether through salary or dividends, as a measure to divide against work days, projects or any other indicators you may be using, to see how much your work costs the company. You can choose to pay yourself as much as you want to and through whatever means you want to, but you still need to see the value of your own work. Otherwise, how can you establish the value of your employees’ work?
Too much Revenue per Client – if one client starts to dominate your revenue (hovering above 30% of your total revenue), you should pay attention. If they slow down suddenly, you are in big trouble. If their percentage grew as a result of your loss of smaller clients, you might soon get yourself in a corner where you are the mercy of your big clients and their budgets. You want to have a fairly even distribution of revenue per current clients to compensate for cuts in budgets or changes in the decision makers.
Client Lifetime – this is how long a client stays with your business. The best way to check is over the number of years that clients usually stay with you. Look whether current clients tend to stay longer or shorter than your past ones. Worry if you see a trend of shortening life spans. Worry more if you see many ‘occassionals’ appear in your numbers. An ‘occasional’ is a small value client, who has a high budget for your service but disappears after the first purchase. There is something about your services (or your people?) that prevents them from sticking around. That is something you may want to explore. Go and ask them what happened.
Value of your pipeline – do not assume that what lies in your pipeline will happen exactly as it is. Make a rough estimation of what is in your pipeline at the beginning of the new year. Calculate how much was in your pipeline at the beginning of last year. What percentage of that value did you actually manage to close? That is the likely percentage that you might be closing this year too.
There are two types of percentages that you can calculate from your pipeline: a) the value of your proposals vs. the value you actually won; and b) the number of clients you went after vs. the number of clients that you actually closed. Calculate both as you may be able to spot some trends. Do you close a high percentage of value but fewer clients? Or the other way around?
Here are a couple of scenarios to consider.
If your revenue went up and your profit went down, you were growing. That does not necessarily mean you will continue to. You might want to consolidate and get your profit back on track. Year on year growth costs money and creates new levels of costs that will compel you to run up the hill faster. You will start gasping for air and may have to stop.
If your revenue went down and your profit went up, you managed your costs very well, but the cuts will catch up with you and arrest your growth. To continue the health metaphor, there is no cut without bleeding. The amount of blood and damage depends on whether you touched a vital organ or just a bit of skin. In professional services, the vital organs are your people. If you ever have a moment of smugness that pushes you to think that ‘you could do without that person’, think twice. People are, literally, the value of professional services.
If your revenue went down and your profit went down, assuming the world is not in a great recession again, project for a downturn. You are shrinking, and you need to find out why. Check the trend against client churn, and check the segments of clients who are ‘churning’. Your market might be changing and is sweeping the carpet from under your feet. And it sounds like you have not seen the signs. A sudden growth is unlikely without some re-positioning and soul-searching.
Whatever you do, do not just assume that you need to project for growth year on year. You are better off projecting a small increase in revenue and a healthy profit and have a nice surprise at the end of the year when you exceed both.
P.S. No, you cannot unexpectedly start growing after a couple of years of decrease and negative client churn. You might be able to recoup the difference you lost, if you work hard. Ask that coach who tells you that you can double your business overnight to tell you when they in fact doubled their own coaching business overnight…