In today's insurance environment, a successful insurance agent or broker must have good sales management, good operations management, and good financial management. If the management of sales and operations is inadequate, revenues obviously won't grow, productivity will be lower than it should be, and/or the environment will be chaotic. If an agency's financial management is inadequate, however, years may pass before the problems becomes evident-and it may be too late to fix them.
Let's look back at the evolution of today's agency financial management. As you do this, think about your own agency and the role of your financial manager.
Evolution of the Financial Manager
In the not-so-distant past, an insurance agency's finances may have been managed by a bookkeeper sitting in a dark back office sweating over an account current ledger (wearing green eyeshades, of course). Life was stressful for that bookkeeper because all the columns on his ledger had to balance, and much of his work had to be done manually. Before the advent of spreadsheets, financial projections or forecasts could be done, but this was slow and tedious.
When agency automation was introduced, it came with the automatic computation and printing of account currents and many other financial reports. The average agency had increased in size, and the financial manager might now be an accountant. Life was still stressful because he was most frequently responsible for the new computer system. He knew very little about computer software and hardware, but he was the logical choice for this responsibility, since anyone who understands debits and credits must understand computers-right?
Need for Savvy Financial Management
In recent years, the world of the insurance agency has changed dramatically, and the need for effective financial management has increased. Much of the accounting is done automatically by the computer, with the remainder handled by the accounting staff. The computer system is frequently managed by an Information Systems Manager. The financial manager may have responsibility for the accounting, automation, and/or administration departments, but his role has expanded significantly. With the amount and speed of change occurring and the significant pressure on profit margins, the financial manager is having to do much more than ever in the past.
In the past, financial managers tracked the agency's overall performance. Today, operating performance is needed on every profit center, department, book of business, and producer. Decisions are made every day on marketing strategies, producer compensation, staffing, and so on. Consequently, detailed and accurate information is required on every aspect of the operation.
With the pressure on profit margins, an agency must effectively manage revenues and expenses. As a result, the financial manager is not just tracking receivables, investment income, and expenses, but is also finding ways to negotiate better agreements with carriers, financial institutions, and other providers. He is not just keeping score-he is managing.
For large agencies today, opportunities abound for acquisitions, mergers, or other strategic affiliations. The impact of these transactions on profitability, cash flow, taxes, operating performance, and agency value must be managed.
In addition, there are challenges presented by fees versus commissions and by alternative risk-financing options, such as risk-retention groups, captives, traditional self-insurance, etc.
Budgeting is no longer a perfunctory exercise. It must be much more sophisticated and precise. The financial manager must coordinate the budget-development process, which will involve most of the agency, and then provide effective tracking and accountability for the results.
With fluctuations in agency values (unfortunately, mostly downward), the issue of fair market value must be understood, tracked, and managed. This is a responsibility appropriately filled by today's financial manager, the 'steward of the agency's value.'
What About Your Agency?
Regardless of its size, today's insurance agency needs an effective financial manager-a role much broader than that of a bookkeeper or accountant. In large agencies, this role is performed by the Chief Financial Officer (CFO), who is usually a member of the senior management team, involved in virtually every strategic decision made in the agency, and ideally has the skills needed to respond to the new challenges. In small and mid-size agencies, this role is likely to be filled by an accountant or bookkeeper, with the senior principal taking a more active role in addressing many of the issues that a CFO would in a larger shop.
What role does your financial manager play in the management of your agency? How would you answer the following questions:
- Are you getting the highest possible return from your investment in producers and staff?
- Do you clearly know which departments or products are profitable (and which aren't)?
- Is your budget truly an effective management tool?
- Are you maximizing your agency's investment income?
- Is your accounting and finance function properly staffed and effectively run?
- Are you in a position to properly assess and respond to opportunities for acquisitions, mergers, and other strategic affiliations?
- Are you getting the financial and management information you need to manage the agency effectively?
If you can't confidently answer 'yes' to these questions, many of your Best Practices competitors can. If your responses are 'no' or 'I'm not sure,' maybe you need an audit of the financial management function of your agency, some additional training for your financial manager, or the services of an outside CFO to complement their efforts.