Let’s Start with the Numbers

“I remember those five people sitting in your staff meetings around the dining room table and thinking that those were a lot of mouths to feed.”

My wife, Anne, wasn’t reminiscing about preparing lunch for my five-person staff 25 years ago. She was thinking at the time about whether I had enough business to pay them all. So was I.

Having launched my company, Financial Managers, in 1983 with four clients inherited from my predecessor in the part-time CFO business, I had added capacity first by allying myself with a part-time consulting staff accountant and subsequently by hiring strong accountants and financial analysts.

Approaching our five-year anniversary in 1988, I not only had five kids of my own to feed, but four full-time associates and a Northeastern co-op student who together served twenty regular clients. It was a significant monthly “nut” and created a lot of ground for me to cover. To reduce my selling time, I priced our services to produce a one-call close: almost no prospective client pushed back on price and seldom did they complain about not getting their money’s worth.

That was, of course, a signal to raise our fees. As I did so, some of the clients became more demanding, resulting in more time by me spent on quality control, and leading ultimately to an expensive upgrade in the capabilities of my staff. The more talented associates I brought on, the more the pressure by them to do what I was doing – the things that I enjoyed the most – connecting one-on-one with the owners and presidents of my client companies.

It came to a head when a prized new hire immediately tried to usurp my role with three of my clients. Her successful background as a sole practitioner effectively disqualified her from working as a collaborator with me, and she was gone within three weeks.

All of this happened a quarter-century ago, but it came flooding back to me as I sat last week with an independent service provider who is seeking to double his revenue run rate in the next 12 months from the current $20-25,000/month level that he achieves with a single employee. These are some of the key lessons he’s learned in 15 years of operating solo, all of which resonated with me:

  • Talented and ambitious potential employees in his field want a route to partnership.
  • Less well-directed employees need time-consuming direction and supervision.
  • A monthly retainer in return for continuing service provides a recurring revenue stream which is much more valuable than one-time project work billed hourly.
  • Your total retainer fees should cover your nut, including your own compensation, so that the less-consistent hourly fees can be highly profitable, even if transitory.
  • You have to track your time, client by client, to know where you realize the greatest return.
  • In doing so, you soon recognize that 8 clients at $3,000/mo. are more easily and profitably managed than 24 clients at $1,000/mo.

Our initial conversation focused on numbers: the monthly cost of a $75,000 new associate increases to $8,333/month with payroll overhead (see Draining the Swamp side bar). This represents 56 billable hours a month at $150, which can be absorbed by three clients on a retainer of $3,000/month. But, until three or more new clients provide $9,000 in revenue, the added staff person will be a drag on my client’s profit and, possibly, his own compensation. The upside? With the new person fully engaged and at least 80% billable (32 hours per week), his or her monthly gross billing potential exceeds $20,000. The goal of doubling the run rate by the end of the year, getting to $50,000 in billings by December, seems within reach.

But – it seldom happens that way. Clients come and go, often unpredictably. The same with employees. When you’re just starting to climb the slope of building something beyond yourself, the loss of a couple of major clients or a key employee can lead to a hard slide down the mountain. Obviously, a solid marketing and sales plan is critical, but that’s beyond my realm here (reference my main man, Michael Katz, on this subject). Equally important is a strategic financial plan, addressed as follows:

  1. What’s your nut? What are your standard monthly expenses, including your own salary and payroll overhead?
  1. What’s your top end? If you and your current staff person(s) were fully engaged, what is the best financial result you could hope to achieve right now? What’s keeping you from that?
  1. Where are you going? What are your one-, two-, and three-year financial goals in terms of revenue, staffing expense, number of clients, average fee, and bottom line? What does the organizational structure look like at each milepost – partners, seniors, juniors, compensation, and skills?
  1. How are you going to get there? What is the cost of the marketing and sales plan by which you generate and close multiple client prospects? Further, do you possess the sales persona to pursue and close these deals?
  1. How fast can you grow? What’s the learning curve for your employees? How long do you have to carry them before they start contributing to the bottom line?
  1. What’s the turnover cost – of your people and of your clients? Neither is likely to be immediately replaceable.

Sitting at the table with my associates those years ago, I hadn’t really thought this all through, much less projected it on a spreadsheet. More important, beyond the numbers, I hadn’t confronted the critical issue: I really didn’t want to spend most of my time training and managing a team of associates. Instead, I wanted to work one-on-one with the owners and senior managers of small companies, providing them with the benefits of my experience and convincing them to do what was right.

As it turned out, my ability to deal successfully with them and their numbers made most of my associates redundant, and the number I have ended up with today is the same number I started with – one. Me.

Life is a lot simpler this way.