Not enough financial advisors are creating, or sticking to their, business budgets. And instead of planning for their expenses, they react to events only as they come up, says April Lynn Levitt, a coach with the Personal Coach in Toronto.

However, by being proactive and deciding how much should be spent on areas such as staff and technology, you have more control over your expenses and your profit, Levitt adds.

Here are the four steps to creating a budget:

1. Calculate your overhead expense ratio
If you ask a group of advisors what their overhead expense ratio is, many will be unable to provide that number, says Levitt. They will, on the other hand, be able to summarize their expenses.

But that is not enough. By understanding your overhead expense ratio, you will see whether you are spending enough on your practice and how your practice’s expenses compare with those of other advisors.

The calculation consists of taking your annual expenses and dividing it by your revenue. The result is your overhead expense ratio.

There are some basic standards on what an advisor should be spending on his or her business. Advisors who focus solely on insurance should expect to spend about 30% of their revenue on their practice. Investment advisors, on the other hand, should be dedicating approximately 40% of their revenue to business expenses because of possibly higher dealer fees and greater staffing needs.

2. Determine your expenses by category
Your major budgetary needs are the following: staff, which includes salaries and benefits; rent; technology and telecommunications; marketing; office supplies; fees and licenses; accounting and legal; and transportation costs if you attend many meetings out of the office

The way in which you allocate your resources will depend on your own preferences and priorities. However, it should be noted, that advisors who have a very low expense ratio are usually not spending enough in staffing or marketing.

3. Create monthly profit and loss statements
Advisors should be reconciling profits with their expenses on a monthly basis in order to set targets for new sales.

“Most advisors [produce these statements] once a year when they have to do their taxes,” says Levitt, “but if you know this monthly, it can give you great information.”

An important element of this step is knowing where your recurring revenue is coming from. This will be the base of your budget as it allows you to understand how much more you need to earn to cover the next month’s budgetary requirements.

However, you need to be realistic in your forecasting. “A lot of times, advisors are overly optimistic in what their sales are going to be and then some things don’t come through,” Levitt says. “I always recommend [being] conservative and then everything else is a bonus.”

4. Consider your personal lifestyle
What income do you need in order to facilitate a lifestyle that you enjoy? Does that income provide you with enough remaining funds to run your practice?

A business budget and a budget for your personal life go hand-in-hand, Levitt points out.

So, if you find that your business is consistently posting losses, you will have to make a decision on whether to spend less on your practice or your personal life.