KEYS TO FINANCIAL MANAGEMENT SUCCESS
by Catherine Oak
Following these six guidelines will help keep your agency in fine financial fettle.
Owners are usually oriented toward sales rather than the financial picture. As a result, managing the agency’s accounting function is often the owners’ least favorite task.
In the future, you will have fewer dollars available from both commissions paid and market cycles. To maintain your personal income and stock value, your agency will need better accounting management.
Well-run firms follow these financial management guidelines:
- Make an ongoing effort to control expenses. Better firms are running leaner and meaner, especially in the area of compensation expenses. Better firms have fewer people and pay them more.
- Develop an annual budget with a line-by-line analysis of expenses. The analysis includes a comparison to other firms and takes the goals set by management into account. This is far better than managing expenses based on past history. It’s far easier to manage day-to-day expenses when a budget has been set.
- Use profit center accounting by line of business and within lines (such as small Commercial accounts) whenever possible. This accounting should be done either informally once or twice a year, or formally on a monthly basis. It should be easy to produce separate income and expense statements for each profit center. Charge direct expenses by line, and determine allocations for indirect expenses (especially for owner compensation and bonuses, computer and accounting expenses, and so on).
Profit center accounting helps management learn:
- How to properly compensate and award bonuses to department heads based on profitability
- Where the profit is coming from, so sales efforts can be properly focused
Insurance is one of the few industries in which owners don’t understand clearly the cost and profitability of their various products. This lack of understanding is due to owners’ lack of financial skills, as well as the lack of data available to help them measure profitability by line of business and by account.
- Streamline collections to earn more investment income. Putting smaller Commercial accounts on direct bill should more than repay the costs of personnel handling the invoicing and collection of these accounts. Adopt a stringent written collection policy, with deviations as the exception. Hold producers responsible for bad debts. Do not advance premiums on behalf of clients.
- Increase capital investment in better people (technicians and producers), computers, office equipment, and target marketing. This will build future value, rather than “bonusing out” as much profit as possible, as many owners have done in the past.
- Make daily decisions with an eye to agency value. This type of focus helps managers make better decisions, which will ultimately lead to more money for their retirement (from either the internal sale of their stock, merger with another firm, and/or eventual sale of the firm to a third party).
It’s essential for a principal to oversee the agency’s financial affairs. Because future commissions are likely to decline, astute financial practices and management are essential.
Catherine Oak, together with Bill Schoeffler, runs Oak & Associates in Glen Ellen, CA. Their consulting firm specializes in agency management, automation, clustering, E&O, evaluations, mergers, and producer compensation. You may e-mail Oak at [email protected], call her at (707) 935-6565, or visit www.oakandassociates.com.