Financial Management 101

By | July 4, 2022

What makes the difference between an average agency owner and a great one? The key is learning the skills of financial management.

There are many times that consultants are called in to assisst owners with financial problems. Some owners have left this financial management function to an agency employee, like a bookkeeper, or to a partner that may have taken on this task by default. Often the other owners trust this person to handle everything with very little checks and balances in place.

Agency owners frequently start off as producers for another agency. The step to ownership occurs after many years of selling insurance. Producers can get frustrated working for others, decide to quit and start their own firm.

The required management skills for the role of an owner are typically learned on the job rather than through formal training. Owners that do not embrace the various management tasks will tend to ignore the functions that they deem to be a burden or a necessary evil.

Accounting and financial management tasks in a firm tend to suffer because of owner indifference, fear and ignorance of the subject. And, if this is the case the astute agencies hire the right chief financial officer (CFO) or accounting manager to perform this role, reporting to the owners.

Importance of Financial Management

Today, firms have fewer dollars available due to lower commissions being paid, cyclical market conditions and increases in expenses. These pressures make management of the financial affairs of the firm even more critical.

Effective financial management is necessary to provide the owners with the same personal income and value for their stock as in the past.

There are certain financial management characteristics that all well run firms exhibit. Financial management starts off with efficient analysis of revenue, expenses, assets and liabilities. Periodic review of financial statements should include comparisons in three areas:

  1. Past performance;
  2. Future budgets; and
  3. Industry standards.

The well run firm always displays good control over all expenses. Compensation expenses (which account for two-thirds of all expenses in the average firm) are thoroughly reviewed. Better firms run “meaner and leaner” and will have fewer employees, but might pay them each above-average salaries. These firms work toward hiring the best.

Use Profit Center Accounting

Profit centers are a key financial tool used by high performing firms. This accounting technique provides owners with very insightful information, such as the source of revenue, expenses and profit.

Profit center accounting should be done by line of business as well as within lines (such as small commercial accounts), whenever possible. Separate income and expense statements can be easily produced for each profit center on most agency management software systems.

Direct expenses should be charged to each line of business. Allocations can be easily determined by management for indirect expenses (especially for expenses of owner compensation and bonuses, computer and accounting) based on time used or percentage of total revenue that line of business is to the total commissions of the firm.

Improve Collections

The collection practices in well run agencies are streamlined, enabling the firm to earn some investment income. Putting many commercial accounts on direct bill, especially the smaller accounts will eliminate the costs of personnel to handle the invoicing and collections of small accounts.

A stringent collection policy should be in place. Deviations from the policy, such as advancing premiums on behalf of clients should rarely be allowed.

Capital expenditures should be made by investing in better people (both technical and salespersons), good computer systems, efficient office equipment and funds for sales tools, such as target marketing.

This allows the owners to build future value rather than reaping short-term gains through bonuses or by taking out as much profit as possible. Owners that do this are essentially selling the firm’s value to themselves by not reinvesting in the firm.

Strategically Manage the Firm

The owners’ role in most medium to large-size firms should be strategic rather than focused on the day-to-day tasks. The employee handling the accounting/bookkeeping will perform all the necessary functions, including preparing reports for management. The accounting manager’s job description should include a checklist of all the typical tasks that he or she is expected to perform. (Contact Oak & Associates if you would like to have an Accounting Manager Job Description/Financial Review Checklist.)

All management decisions should be made with a focus on how these decisions could impact the value of the firm. This type of focus helps management choose the direction that will ultimately lead to more money for their retirement from either the sale of their stock internally, their merger with another firm and/or the eventual sale of the firm to a third-party buyer.

Was this article valuable?

Here are more articles you may enjoy.

From This Issue

Insurance Journal West July 4, 2022
July 4, 2022
Insurance Journal West Magazine

Super Regional P/C Insurers; Markets: Flood & Earthquake, E&O