Proven ways to increase potential earnings and investment value of your business.
You might be overlooking your greatest opportunity to build return on your investment, while significantly boosting its value and attractiveness to outside buyers.
Exercise financial control over your largest investment, the one closest to you, and over which you have the greatest control: your agency!
FINANCIAL CONTROL AND VALUE
With agencies selling at 4.5 to 6.5 times Earnings Before Interest, Taxes, and Depreciation Amortization (EBITADA), each dollar saved affects the value of your agency. Controlling expenses will enhance the bottom line and maximize Owners Reward (net profit+owner compensation/net revenues), while adding long-term value to your agency. We don’t recommend making drastic reductions in costs that might endanger the long-term viability of the business, but implementing ideas to boost its efficiency and profitability.
FINANCIAL MANAGEMENT
The first step toward financial monitoring and controls is to prepare an annual budget that incorporates the sales goals of your producers, estimated contingencies, fee income, and investment income. You’ll need to estimate expenses for the first year, but for every subsequent year, you’ll be better able to project increases or possible decreases. The key is to stick with your plan. Expenses that are “exceptions” to the plan add up quickly and defeat the benefits the budgeting process provides.
It’s important that someone in the agency play the role of cost controller by saying “no” to unbudgeted expenses. Developing a monthly budget-to-actual analysis will help identify and control unexpected variances. It also makes sense to calculate certain key ratios on a monthly basis, including Owners Reward, Revenue per Employee (net revenues/number of employees), Expenses per Employee (net expenses/ number of employees), and Contribution per Employee (Revenue per Employee/ Expenses per Employee). Compare each of these with the Best Practices of peer-sized agencies to determine your operating efficiency.
TOP-LINE FOCUS
To realize the greatest returns from your agency’s operations, focus on both revenue and expense components. These key revenue items can have significant impact on profitability:
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New Business Generation: Grow your book by adding new customers, not just through rate increases. Encourage producers to sell new accounts by providing incentive compensation for new business and for growth of the book. Generate a healthy environment of interoffice sales competition, and hold regular sales meetings, as well as producer accountability meetings. Transfer servicing of accounts to CSRs to free up producers to sell.
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Market Consolidation: Merge markets to take advantage of override fee income, while creating leverage in contingency contracts negotiation. Because contingencies are separate from normal agency revenues don’t plan on them to cover operating expenses.
KEYS TO EXPENSE CONTROL
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Employee Feedback: You can achieve significant cost savings by listening to employee recommendations on identifying workplace inefficiencies and duplication of effort, and developing cost-effective solutions.
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Compensation Expense: Compensation is by far the largest outflow on the agency’s income statement. People — the agency’s most important asset — can be the most significant detriment to its success if they’re overcompensated and undermotivated.
Compensation costs represent approximately 63% of revenue for the average agency. If compensation costs as a percentage of revenues significantly exceed this percentage, you might well have an overstaffed operation that doesn’t provide good value.
Key indicators of employee efficiency include revenue per employee, as well as commission per producer and per service person. We often find discrepancies in the amount of business handled per CSR in the same departments. Producer new business sales provide a key indicator of producer productivity. Contrary to the conventional wisdom that increasing a producer’s book decreases productivity, we’ve found that the most productive producers find ways to delegate service work so they can keep generating new business. Implement compensation plans to reward producers with large books who produce good new business results.
Your companies can help you reduce compensation costs. Some carriers will service an agency’s business through their customer centers. The cost to the agency in lost commission is usually minimal, but the savings in CSR compensation can be significant. Direct claims reporting can also cut costs significantly.
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Employee Morale: Consider the impact of employee turnover on the bottom line. The higher your employee retention rate, the lower the expenses of using temporary workers, recruiting and training new employees, and the effect of an increased workload on your staff. Providing training and performance management also improves employee performance.
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Automation Expense: Many agencies still aren’t using their automation systems to maximum effect. Take advantage of transactional filing in Personal Lines and Small Commercial Lines to boost productivity by eliminating duplication of effort and gaining time for more productive activities. Streamlining automation can go far to improve revenue per employee and bottom line profitability. Use your automation system to generate daily, weekly, and monthly management reports that help you budget, forecast, and monitor agency performance.
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Advertising Expense: Too many agencies overspend on ad campaigns that generate minimal new business. Maximize your benefit from advertising costs by linking the expenditure to a specific marketing effort with a desired outcome. Cut costs by isolating target markets and geographic areas. Determine the advertising dollars spent for each new account written and evaluate the campaign against original estimates to determine how to gain the highest return on your ad dollar.
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Bad Debt Expense: To minimize costs from uncollected accounts, don’t act as a financing intermediary for customers. Cancel past-due accounts before advancing funds. Maximize direct billing to curb your exposure to past-due accounts receivable balances and the time and expense of collection.
SEIZE THE OPPORTUNITY
Few people have the opportunity that owners of insurance agencies enjoy: making a direct impact on the financial success of their investment. Take advantage of this challenge to make your agency the most profitable investment in your portfolio. Implement financial management procedures to maximize your return on investment and build the long-term value that will make your agency increasingly attractive to future investors.