AGENCY FINANCIAL MANAGEMENT 101
by Bill Schoeffler and Catherine Oak
Because most agency owners are former producers, they seldom have financial management expertise. This article focuses on the basic skills needed to keep your agency in good fiscal health.
Introduction
Owners who don’t embrace financial management will tend to ignore the functions that they see as a burden or a necessary evil. Accounting and financial management in these agencies tend to suffer because of owner indifference, fear, and ignorance.
Agencies have fewer dollars available today, owing to lower commissions a soft market, and increases in expenses. These pressures make financial management critical in order to provide the owners with the same personal income and value for their stock as in the past.
All well-run agencies exhibit certain financial management characteristics. Financial management starts with a comprehensive analysis of revenue, expenses, assets, and liabilities. Periodic review of financial statements should include a comparison to past performance, future budgets, and industry standards.
A well-run firm always displays good control over all expenses. Compensation expenses (which account for two-thirds of all costs in the average agency) are reviewed thoroughly. Better firms run “meaner and leaner.” They have fewer employees, but pay them above-average salaries because they hire only the best.
Profit center analysis is another key financial tool for high performing agencies. This accounting technique provides owners with insightful information, such as the source of revenue, expenses, and profit. Do profit center accounting by line of business, as well as within lines (such as Small Commercial accounts), whenever possible. Most agency management systems can easily generate separate income and expense statements for each profit center.
These guidelines can help you keep your agency in a healthy financial state:
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Charge direct expenses to each line of business. You can easily determine allocations for indirect expenses (especially for owner compensation and bonuses, computer and accounting expenses, etc.), based on time used or percentage of total revenue.
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Streamline collection practices to help your agency grow more investment income.
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Put Small Commercial accounts on direct bill to eliminate the costs of personnel to handle invoicing and collection of small accounts.
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Implement a stringent collection policy, with no deviations such as advancing premiums on behalf of clients.
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Make capital expenditures by investing in better people (both technical and salespersons), computers, office equipment, and target marketing. This will allow you to build future value, rather than reaping short-term gains through bonuses or taking out as much profit as possible (as many owners have in the past). Failure to reinvest in your agency will leave a hollow shell by rapidly decreasing the firm’s value.
The agency owner’s role in most medium to large-size firms should be strategic, rather than focused on day-to-day tasks.
The employee handling the accounting/bookkeeping will perform all necessary functions, including preparing reports for management. The accounting manager’s job description should include a checklist of the tasks that they’re expected to perform (see below for sample).
Base all management decisions on how they will impact the value of the firm.
This type of focus will help you choose the direction that will ultimately lead to more money for retirement from either an internal sale of stock, a merger, and/or the eventual sale of the firm to a third party.
PERIODIC FINANCIAL REVIEW CHECKLIST FOR ACCOUNTING MANAGER
Every agency should develop a checklist for the accounting manager/bookkeeper to follow. Good communication between accounting and the owner is crucial to effective financial management.
All checklists should include these items:
Monthly
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Run balance sheet
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Review cash position
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Review receivables and payables
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Calculate ratios: Trust, current, etc.
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Report on the analysis of ratios, cash position, A/R, A/R to the owner
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Run aged A/R report
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Review and correct 60+ days receivables
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Report to owner on status of aged A/R
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Run monthly and year-to-date income statement
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Compare statement with last year, the budget, and industry standards
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Analyze any deviations
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Prepare monthly producer statements for owner’s review
Quarterly
Do these analyses on the quarterly income statement:
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Calculate changes from the previous quarter and last year (net change and % change)
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Estimate revenues and expenses for the next quarter
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Calculate net profit and make recommendations how much should be reserved
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Review investments and debt liabilities. Make recommendation to owner on restructuring or moving to minimize payment and maximize return.
Semi-Annual
1. Calculate personnel profitability standards (revenue per employee, etc.).
2. Analyze the book of business and producer/ CSR workloads and provide report to owner with recommendations.
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Determine CL & PL commission revenues and the number of accounts handled (add to CSR workload and report the number of transactions, if possible)
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Calculate average size of accounts
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Compare with industry standards
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Compare with last period and last year
3. Prepare a report showing each market’s volume, compared with the previous period and previous year.
4. Prepare a list of top 50 accounts for each producer and the agency, compared with the previous period and previous year.
Annual
Assist the owners to develop a budget for the next year.
Bill Schoeffler and Catherine Oak, CIC, AAI, are partners in the consulting firm, Oak & Associates, based in Northern California. The firm specializes in financial and management consulting for independent insurance agencies, including valuations, mergers acquisitions, clusters, sales and marketing planning, as well as perpetuation. They can be reached at (707) 936-6565, e-mail [email protected] or visit www.oakandassociates.com.