Best Financial Services
Critical Issues
In order to grow profitability by 5% per year and allow Linda Best to retire within 10 years, Best Financial Services Inc. must address the following:
How to retain current clients to stimulate future growth.
How to attract more high-end clientele in order to increase revenue and ultimately profits.
How to increase capacity to take on additional clients so that Linda can maintain her desired work-life balance.
Situation Analysis
The financial planning industry in Sarnia is highly competitive, hosting a number of large multi-national corporations (ex. Sun Life Financial) and numerous small businesses and individual practices. The threat of new entrants is very high since there are low barriers to entry and low product differentiation (Exhibit B). This implies that there is little growth and high customer awareness with regards to current product offerings. The bargaining power of buyers is similarly high since there are over 60 different market participants and the cost of switching from one service provider to the next is virtually nothing (Exhibit B). Furthermore, the threat of substitute products is low as competitors offer similar products with the exception of company specific packages (Exhibit B). This competitive environment represents a critical issue for Best Financial Services since there are a large number of firms competing for a limited number of potential clients. This client-to-business ratio makes it imperative that Linda insures the retention of her current clientele (Exhibit J).
Best Financial currently has 600 clients. Of those 600, 488 clients (low-end clientele) account for $7.04 million in total assets while the remaining 112 (high-end clientele) account for $14.96 million in total assets (Exhibit J). On a revenue basis, the low-end and high-end clients account for $106,289 and $225,864 in revenue, respectively. This means that the high-end clients hold double the amount of total assets and bring in two times the amount of revenue as the low-end clients (Exhibit J). This represents yet another critical issue for Best Financial in that the lack of a diversified revenue stream could put them at serious financial risk should other high-end clients like Gerald Young decide to leave. To quantify the potential fallout of a high-end client leaving, Best Financial would lose, on average, $133,571 in assets as opposed to the loss of $14,426 in assets, should a low-end client leaves (Exhibit J).
Linda is currently operating at near maximum capacity. This indicates that Best is at her practical capacity limit, in which she can continue to operate at a relatively high level of efficiency without being a detriment to her company. Consequently, the company may miss out on lucrative sales to customers, and put further pressure on Linda’s desire for growth.
Decision Criteria
Must increase profitability
Must attract additional Clientele
Must increase current capacity
Options
Buying a Block
Acquiring a block of business will stimulate short-term profit growth. However, doing so would conflict with Linda’s desire for a balanced work schedule. Furthermore, the increase in workload capacity by 10 hours per week will not be sufficient enough to manage these new clients as Best Financial will be short 200 labour hours.
Linda expects to retain 70-90% of the clients. Taking a conservative approach, 70% would be the more reasonable estimate. As shown in Exhibit C, at retention rates of 70% and 90%, profits for the 2008 fiscal year would increase by $14,348 and $16,628, respectively. This indicates that in the four months following the purchase, Best Financial will experience profit growth at either of the two scenarios. Similarly, at retention rates of 70% and 90%, profits for the 2009 fiscal year would increase by $6,269 and $12,633, respectively. Meaning, this alternative will continue to remain profitable in the following year. If retention rates fall below 49% then