It's not a regulation, but it's no less inviolate a rule: your income will be completely dependent on where you and your team spend your 1,920 work hours a year.
In a service business, time really is money. The allocation of work time is the engine of your productivity. We developed 'the law of 1,920' a decade ago to understand what differentiates exceptional entrepreneurs who build better businesses. If you were to work 48 weeks a year, and 40 hours a week, you would amass 1,920 hours per year. Why is this so important? Because it's an amazing tool to help you measure and improve your productivity.
The rule of 1,920 simply stated as a formula is: annual revenue = hourly work value X 1,920.
For those who need a refresher on algebra, to figure out what your time is worth per hour, just divide your target annual income by 1,920. Let's imagine you would like to make $1 million per year. Divide one million by 1,920, and that means you must generate $512 per hour over the course of the 1,920 hours. Let's apply this productivity tool to your workday and then to your business.
Applying the law of 1,920 to your workday
Reality is that you probably have only one core competence: one thing that you are really exceptional at, a couple of things you are pretty good at, and many things in your workday that you are only average at. How much of your time is spent on $10-an-hour work? What do you do that is worth many thousands per hour? Here's a two-step exercise to measure your productivity:
1. Track one typical workday and itemize your entire day into 15-minute increments. You will probably end up with about 20 events (several things will take two to four of your 15-minute blocks).
2. Assign a dollar value (what you might pay someone else to do) to each of those 15-minute increments on your behalf.
This simple exercise will reveal what we've seen in countless reviews with advisers: About a quarter of your workday is spent on things of little value to your business, like chatting, reading the newspaper, web surfing and extended discussions with clients. About a third of your time is probably spent on less than optimal work (not your core competence) that is nonetheless imperative to the business: fixing technology, dealing with staffing issues, compliance work, reviewing trades, investment research, paperwork and budgeting. That leaves a remarkably small amount of your workday to do the high-value work that will increase your income.
Applying the law of 1,920 to your practice
Take all of your employees, multiply that number by 1,920 and divide that by your annual revenue. You now know what the average work hour is worth to your firm. For example, if you have $1 million in revenue and have three employees, including yourself: 1,000,000 / (1,920 x 3) = $171. How much time in your office is being spent on low-value work? Is your collective work productivity something you measure? An average firm has productivity of $80 per hour (annual revenue of $150,000 per employee). A good firm has productivity of $150 per hour (annual revenue of $280,000 per employee). An exceptional firm has productivity of $200 per hour (annual revenue around $380,000 per employee.) How are you doing?
How to improve your productivity
There are only two ways to increase your productivity rate: increase your revenues or reduce your work hours. The secret of exceptional firms is creating more capacity (by freeing up more time) so that you can generate more revenue per work hour. Consider the following:
1. Ensure everyone on the team is specialized and doing their best-value work.
2. Hire someone to do the low-end work, which allows for more revenue-generating work to be completed by your senior teammates.
3. Partner with someone or outsource the work you really shouldn't be doing. You probably aren't doing physical custody or underwriting insurance. What else should you be outsourcing? Are you really better than a specialist? Is it what your clients really pay you to do or do they simply want you to assure that it gets done?
Many advisers love having their fingers in all aspects of their business. However, they are unwittingly limiting their potential success because they will never have the hours in their day to do the high-value work that can create real operating lift in their business. I spent three full years of my career with a post-it note on my phone that read 1,920. It always reminded me when I was being productive. Now it is part of my DNA to always ask the question: What could I be doing right now instead of this?
Joe Duran is chief executive of United Capital and the bestselling author of “The Money Code: Improve Your Entire Financial Life Right Now." Follow him on Twitter @DuranMoney.