Agency Financial Management 101: Following Basics Pays Off

June 6, 2005

One of the weaknesses in small businesses is that the entrepreneur who starts the firm might be excellent in a specific trade, but have little or no skills in running a business. Insurance agencies are the same way. Agency owners frequently start off as producers for other agencies. They step into ownership after years of selling insurance. When they start their own firm, they are expected to know sales plus human resources, administration, financial management and more.

Typically, owners learn their management skills on the job rather than through formal training. Owners will tend to ignore the functions that they deem to be a burden or a necessary evil. Accounting and financial management tasks tend to suffer at many agencies due to owner indifference, fear and ignorance of the subject.

Because agencies today face lower commissions and higher expenses, management of their financial affairs is more critical then ever. An agency needs to be financially sound for its clients and companies, as well as its employees. There can also be a selfish reason: sound financial management is necessary to provide owners with their personal income and value for their stock.

The good news is that basic financial management is easy to learn. Once a system is set up, there is not much to financial management. The key is to develop a system that will be used and not ignored or misused.

Financial management starts off with efficient analysis of revenue, expenses, assets and liabilities. Periodic review of financial statements should include a comparison with past performance, future budgets and industry standards.

The well-run firm always displays good control over expenses. Compensation expenses (half to two-thirds of all expenses in the average firm) are thoroughly reviewed. Better firms run “meaner and leaner” and have fewer employees but pay them each above-average salaries because they hire only the best.

Profit center accounting, which provides the source of revenue, expenses and profit, should be done by line of business as well as within lines (such as small commercial accounts), whenever possible. Most agency management systems will produce profit center reports.

Direct expenses should be charged to each line of business. Allocations for indirect expenses (especially for owner compensation and bonuses, computer and accounting expenses, etc.) can be based on time used or percentage of total revenue.

Collection practices in well-run agencies are streamlined, enabling the firm to earn more investment income. Putting smaller commercial accounts on direct bill eliminates the costs of invoicing and collecting on small accounts. A stringent collection policy should be in place, with no deviations such as advancing premiums on behalf of clients allowed.

Smart agencies utilize capital expenditures to invest in better people as well as computers, office equipment and marketing. This allows the owners to build future value rather than reaping short-term gains through bonuses or taking out as much profit as possible.

The agency owner’s role in most medium-to-large size firms should be strategic rather than centered on the day-to-day tasks. The owner should focus on monthly or quarterly reports as well as reviewing budgets. The accounting manager’s job description should include a checklist of all tasks expected, including preparing management reports. Management should make all decisions based on how they will affect the value of the firm.

Financial management might not be fun, but it should be easy. By setting up a system and spending a little time each month, agency owners can be sure their financial affairs are in good shape and they can focus more on sales. Remember, one sign of a well-run business is the owner makes a lot of money!

Bill Schoeffler, CIC, and Catherine Oak, CIC, CRM, are partners at the international consulting firm of Oak & Associates. The firm specializes in financial and management consulting for independent agents and brokers. They can be reached at (707) 935-6565,
by e-mail at bill@oakandassociates.com, or visit
www.oakandassociates.com

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