Management Information Systems

Other agents generate operating statements on a monthly basis, comparing current year-to-date with last year. Their answer to the above question is, 'If revenues and profits are growing larger this year - we're doing well!' Unfortunately, aside from having computers that generate financial statements, these agents simply have an advanced version of the checkbook philosophy.

Revenue and profits are important: They're like Siamese twins-dangerous to separate. We're all in business to earn profits and most of us would like to do so with growth. But those agents who determine their success by one or another of these measurements may find themselves growing into bankruptcy or profiting themselves out of business.

We all must eat to live. So it makes sense to eat the right foods to provide the nutrition, vitamins, and minerals that our bodies need to perform well. However, if you eat too much (even of the right things) over a prolonged period, your body can't pay the cost of that growth. Your performance diminishes and, eventually, you die. Uncontrolled growth in business can also cost more in expenses than actual growth can support. That's why it's important to keep an eye on expenses as we grow. For instance, if every producer requires a new administrative assistant (or CSR), you will be hard-pressed to pay the attendant bills. Sure, the producers will be sponsored to grow the book of business, but at what cost? If your marginal costs are greater than your marginal growth, you will lose profit and, eventually, go out of business.

On the other hand, many agents are frugal to the point of anorexia. Extreme dieting may appear to achieve the goal of losing weight, but the end result is death. Paying very low wages yields low-performing employees. Eliminating advertising and marketing costs adds to the bottom line in the short run, but will starve any chance of growth in the long run. Agents who squeeze the expense dollar without regard to sponsoring growth find that they have fewer dollars to squeeze each year as costs rise and growth is nil. Eventually, they squeeze themselves out of existence.

While growth and profit are primary indicators of success, many other factors can be used to signal potential problems. A well-designed Management Information System (MIS) will serve as an early warning system for your business, permitting you to make appropriate changes early on and avoid problems that affect growth and profit.

Agency Consulting Group, Inc. has designed MIS for many agencies. While each is tailored to specific areas of importance for the agencies served, all have sufficient common ground to provide a template for general use.

The first rule of thumb for all MIS is brevity. Most agency owners are not interested in having to analyze stacks of paper to determine the health of their businesses. A MIS Report should be no more than two pages long and provide enough information to satisfy agency managers and owners, even if absent. The absentee owner is our definition of the extreme case. If you owned an agency 1000 miles away, what would you need, and at what frequency, to feel comfortable that everything is on target (or to understand what is going wrong)? By answering that question, we came up with the categories of management information reporting that we feel are necessary.

MIS CATEGORIES

Weekly

1. Service Production - How many items were completed last week? Compared to the last four-week average? Compared to a six-month rolling average?
2. Backlog - How much do we have left at the end of the week (that could have been progressed if we had more time) ?
3. New Business - How many accounts (and policies) were written? How much commission was booked? List new business by name.
4. Lost Business - How many (and specifically which) accounts were lost and how much commission did they represent? Identify reasons for each loss.

Monthly

1. Financial - Has revenue grown? As projected in the plan and budget (if we have these tools)? Have expenses been controlled? To the degree expected in the plan and budget? Has expense growth been less than revenue growth? How do this year's profits compare against our own history? Against industry averages?
2. Financial Liquidity - Do we generate balance sheets? Do we understand them? Do we create liquidity ratios and track them against similar periods of the prior year?
3. Receivables - What are our total net receivables? Are they better or worse compared to last month? How are our potential bad debts (over 90 day receivables)? Compared to last month? Do the same customers owe us money over 90 days consistently?
4. Cash Projection - Based on billings and prior year direct bill statements, what are our cash expectations in the next 30 days? Considering our projected expenses in the next 30 days (using last year's monthly expenses for the similar month as a guide), will our cash cover our costs in the next 30 days?
5. Production Reports (by department, i.e. Personal Lines, Commercial Lines) - Compare our monthly and year-to-date commission position against last year's and against our plan. What is our net position (new business minus lost business) for the month and for year-to-date?

Agency Consulting Group, Inc. has developed a recording system that permits most agencies to keep track of incoming work (calls, mail, and walk-ins) relatively automatically. Weekend backlog remains manually listed. Automated methods are available, but agency management and employees prefer the manual system because it both identifies backlog and reminds employees of the next steps needed. Prior week backlog, plus current week incoming, minus current week backlog, yields service production - the amount of work by item count completed by the individual, department, and agency in the course of the week. If this information is measured regularly, rolling 4-week and 6-month averages can be established and tracked. Comparing the current week with these average gives the agency a really good picture of service-related work trends.

Once enough data exists to maintain 4-week and 6-month rolling averages, Line Trends can be developed. A Line Trend is the percentage difference between the 4-week and 6-month rolling average in the three primary productivity categories (Incoming Work, Backlog, and Output). The other major measurement tool is Productivity Trends. This is defined as the difference between the Line Trend for Output and the Line Trend for Incoming Work.

Example:

Line Trends and Productivity Trends comprise an important early warning system. They can alert you if your incoming growth is exceeding your department's processing capability over a prolonged period (we all have crisis periods). If so, either you must change your systems and procedures to simplify processing and accomplish more transactions with the people you have, or staff up. Otherwise, you'll eventually face heavy and consistent backlogs that makes service levels slow and poor.

From a financial standpoint, it's important to measure Total Revenue Growth (vs. last year at the similar time period), Commission Income Growth, Expenses, and Profit. These should be measured on a monthly basis as well as Year-To-Date and should be compared to both the prior year and to the budget (if one exists).

Most agency management systems provide you with a monthly balance sheet (whether or not you pay any attention to it). The reason that the balance sheet is so important is that it provides you a snapshot check-up of the agency's health every month. Like a thermometer, blood pressure reading, or blood test, the balance sheet can quickly tell you if something is going wrong in the business.  Agency Consulting Group, Inc. has an Excel spreadsheet available that does these tests automatically when you enter the Balance Sheet data. Call us if you'd like one.