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Making sense of financial data to drive decision-making

Aug 21, 2022

Business acumen is someone’s ability to understand business issues. Leaders of registered investment advisory (RIA) firms require a wealth of both general and organization-specific knowledge about how things get done and why. It can mean understanding certain business disciplines — finance and accounting, for example — at a deep level.

Your success depends on a comprehensive and evolving understanding of the drivers of growth, profitability and cash flow; an organization’s financial statements; key performance measures; and the implications of decisions on value creation. 

Beyond understanding the numbers on company financial statements, firm leaders need the ability to take their knowledge of business fundamentals, apply it strategically and then take appropriate action.

A must during uncertain times

For an RIA firm, you need to understand how your actions and behaviors impact financial decision-making and how this in turn affects financial outcomes at the firm level. This awareness is especially important in uncertain economic times. It requires flexibility for change as needed.

In short, developing stronger business acumen means a more thoughtful analysis, clearer logic underlying business decisions, closer attention to key dimensions of implementation and operation, and more disciplined performance management.

What are a few examples of financial metrics that an RIA firm should be monitoring and analyzing?  

Understanding financial statement data gives you knowledge to make smart decisions. If you look at specific sections of your statements, profit margin and cash flow margin will always be at the top of the list to monitor. These two metrics specifically reflect how well the firm is doing.  

Some other specific financial metrics that you could be monitoring are gross margin (revenue minus advisor expenses), operating expense trend, quarterly or monthly revenue trend and your No. 1  expense: compensation and benefits. 

Nonfinancial metrics that you should be looking at include a breakdown of wallet share by service, size of advisor in comparison to number of services used, assets under management (AUM) by client age, age of advisors versus age of clients, trending (AUM) year-over-year — to name a few. 

And then there are blended financial and nonfinancial metrics — revenue generated from new advisors versus existing advisors or revenue generated from new clients vs. existing clients. Of all the metrics you could analyze and monitor, pick no more than 10 that are most relevant to your firm and industry. The metrics you choose will help you monitor your path to achieve your goals and align with the budget you’ve established.

Necessary steps

What are your next steps to achieving business acumen and financial literacy? Building a proper finance team, implementing the correct accounting technology, determining the appropriate financial and nonfinancial metrics, and monitoring the data to identify and react to trends is what you have to do. 

This is a big project for any firm to take on. Most don’t have the time or resources to take on a project that significant. But outsourcing your accounting, controller and CFO functions can achieve the same results with a less daunting commitment. Access to an outstanding technology platform with wraparound controller and CFO services can provide you with dashboards at your fingertips to monitor all relevant metrics for your firm. 

How Wipfli can help

Wipfli’s team of seasoned professionals can help you stay on top of all of your financial reporting needs. Our knowledge and experience mean you have more time to focus on your core business services but also have immediate access to the data analytics you need to help your organization thrive. Contact Wipfli to learn more.

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Wipfli Editorial Team