A major flaw in growth planning is the miscalculation of client runoff.
Runoff occurs in every firm. Even firms with superior client service have clients who sell, merge, relocate, die, or leave for a variety of reasons. Your firm’s runoff may be lower, but every firm still needs to factor in some shrinkage percentage. Conversely, if a firm provides more consulting, runoff will be significantly higher. Other factors contributing to a higher than normal runoff include aging clients, industries in a state of change, competition in your marketplace, and the general economic conditions of your area.
Using a $5M firm as the starting point, here’s how the numbers can be deceiving:
A note on rate increases: A 5% fee increase masks growth calculations because most of that increase is offset by increased labor and operating costs. If a firm wants to grow by 10%, they should not count the fee increase as part of that growth.
- 10% growth = $500,000. This is the easy part of the math.
- Add runoff = $350,000. 7% on $5M adds another $350,000 in replacement revenue needed.
- Adjusted organic total = $850,000.
- $70,800 per month in new revenue.
- This is 70% more than the original $500,000 or $41,000 per month estimate.
Here’s the impact on a $10M firm.
- 10% growth = $1,000,000
- Runoff = $700,000
- Adjusted total = $1,700,000
- Monthly = $141,000 in new revenue
Are you bringing in these numbers?
The next article discusses how to breakdown the growth objectives into smaller buckets.