How healthy is your agency? This checksheet and financial analysis criteria can give you the answer.
Use these 10 items to check the financial health of your agency:
- Trust ratio under 1.1 x
- More than 15% of accounts receivable more than 90 days old
- Commission growth greater than 5%
- Producer compensation greater than 30% on renewal
- Debt service greater than profit
- Made acquisitions equal to 25% or more of total current revenue at price above 1.5x in last three years
- Property/Casualty commission per producer less than $250,000
- Revenue per employee less than $90,000
- Expense budget not prepared or monitored monthly
- Salary caps and compensation planning for staff not set at start of each year
If you checked three or more of these items, you’re in the danger zone!
Here’s an analysis of the basic criteria you can use for agency financial analysis:
BALANCE SHEET ANALYSIS
TRUST RATIO
Cash plus accounts receivable/premiums payable should _____ be greater than 1.1x. If less than 1.0x, you're spending carrier premium.
RECEIVABLES RATIO
Accounts receivable/premiums payable. The lower the _____ better. Should be .65 or less; if above 1.0, you're advancing funds.
CURRENT RATIO
Current assets/current liabilities. Should be greater _____ than 1.1 x. If less than 1.0x, must retain profits.
NUMBER OF DAYS WORKING CAPITAL
Current assets minus current liabilities equals net _____ working capital.
Total agency expense divided by 365 equals total _____ daily expense.
Net working capital divided by daily expense equals _____ number of days working capital reserve. Should be minimum 30 days.
DEBT SERVICE ANALYSIS
Reported Pre-tax Profit _____
Add: Interest Expense + _____
Add: Depreciation and Amortization Expense + _____
Total Cash Flow for Debt Service = _____
Less: Projected Debt Service Payments (Next 12 Months) _____
Net Cash Flow = _____
NOTE: To be safe, total cash flow for debt service should equal 130% of projected debt service payments.
THREE-YEAR INCOME STATEMENT VARIANCE ANALYSIS WORKSHEET
A. Calculate average annual growth in commission (excluding contingents) over last three years _____%
B. Calculate average annual increase for last three years for major line-item expenses:
Staff costs _____%
Producers _____%
Benefits _____%
Travel and entertainment _____%
Rent _____%
Equipment costs _____%
C. Identify variances and attempt to explain why variance occurred.
D. Develop action plan to correct variance.
EMPLOYEE PRODUCTIVITY ANALYSIS
Current Year Previous Year
Revenue per employee (includes owners and producers) _______ _______
Commission per C/L staff (exclude producers) _______ _______
Commission per P/L staff (include any full-time P/L salespeople) _______ _______
Commission per producer _______ _______
Revenue per administrative staff _______ _______
COMMISSION SPLIT AVAILABLE TO PRODUCER
Industry % Your Agency %
- Targeted agency profit 20 _____
- Less: five-year average contingents and interest <10>% <_____>%
-
Targeted profit on commissions only 10% _____%
- Commission available to cover all expenses (100% less targeted
-
profit on commissions) 90% _____%
- Less: Business development expense <9.5 >% <_____>%
- Less: Operating/administrative expense <16.0 >% <_____>%
- Less: Staff costs* <37.0>% <_____>%
- Balance of each commission dollar available to pay producer 27.5% _____%
*NOTE: Staff costs consist of management override -5.0%, staff personnel -22.5%, and employee benefits -9.5%
Chris Burand can be reached at Burand & Associates, LLC, PMB 345, 1829 S. Pueblo Blvd., Pueblo, CO 81005, (719) 485-3868, fax (719) 485-3895, E-mail [email protected], Web site www.burand-associates.com.