Cultivating a management mentality

A common misconception among agency owners who began their careers in sales is the belief that agency management and sales management are the same. The art and science of agency management require a unique set of managerial skills that are much broader in nature than those used to manage a sales force. In fact, many of the skills that are desirable attributes in a salesperson — such as an entrepreneurial mentality — can actually be drawbacks in managing a business. This article examines some considerations that need to stay top-of-mind, even when sales are pouring in. While a sales mentality is key to growing a business, a management mentality is what keeps the business on track and profitable.

Outsourcing key expertise
Agency owners who came up through the sales ranks may find themselves becoming entrepreneurial to a fault. Successful sales people are self-starters and problem solvers, who take pride in settling customers’ questions and concerns. Generally, a salesperson will have a “back-office” team supporting him with questions related to daily administrative and operational issues. It’s important for owners to also have a “team of consultants” for matters that arise regarding the development and operation of the business.

Two key professional resources every agency needs to have at the outset are a trusted CPA and attorney. This is particularly true in today’s Sarbanes-Oxley environment where compliance issues are increasingly moving out of public-sector companies and infiltrating even small businesses. Generally, it is easier and more cost-effective to outsource this function than to retain the service in-house. An attorney can help an agency determine the best business structure, review key documents and resolve disputes.

With both CPAs and attorneys, do some homework when determining whom to use. Be sure to ask what kind of experience the firm has in the insurance agency arena.

Another function that is commonly outsourced is marketing for tasks such as graphic design, advertising placements and public relations. Hiring an external firm to perform these functions frees up staff to function on what they do best, servicing accounts.

Capital considerations
Once the resources are in place and the agency is running smoothly, growth becomes a natural consideration. Shoring up working capital is often the first priority. By definition, working capital consists of current assets minus current liabilities. The term is an assessment of how much liquidity a firm has available to build its business and can be positive or negative depending upon how much debt the firm is carrying. Companies with more working capital will be more successful since they can improve their operations and seize opportunities to further develop their business.

Too many times, entrepreneurs avoid seeking capital and instead invest personal funds in their business through use of personal savings or personal revolving debt, such as a credit cards and home equity credit lines. Intermingling personal and business finances can be a recipe for disaster, particularly at tax time. By separating personal and business debt, agency owners can avoid many headaches in the event of an audit. Identifying and claiming deductions at tax time is also much simpler when business and personal financial records are separate. A CPA and attorney should also counsel agents to keep personal and business debt separate.

Traditional sources of capital include commercial banks and venture capital firms. In recent years, boutique lenders that specialize in the insurance industry have introduced commission-based lending. Retail and business banks will expect to see a business plan, so have one ready. Be prepared to articulate how the funds will be used. Will they go to hire additional staff, invest in technology or purchase another practice?

Venture capitalists are firms that provide the start-up funds for new and novel ideas. Typically, venture capitalists are looking for an idea that is outside of the mainstream. A pitch to a venture capitalist will take advantage of a salesperson’s ability to sell a vision and incite the enthusiasm of the lender. Commission-based lending allows agencies to tap into the equity of their primary asset — the book of business. Unlike selling a book of business, commission based lending temporarily redirects commissions on renewals to the lending institution. When the loan is re-paid, the commissions revert back to the agency.

Managing capacity
Access to working capital isn’t enough. A growing business must have the capacity to sustain growth. The industry is ripe with agencies that purchased a large book of business only to find that the servicing issues resulted in customer run-off. Additional business will add to an agency’s revenue stream, but it also will require additional staff, technology and related resources to service the increased volume.

Reputation is critical in an industry where multiple agencies have access to the same products and carriers. Having ready access to capital is important when managing capacity. An agency should be sure that it is financially positioned to support an increase in servicing volume. Ensuring adequate capacity in terms of staff, operations and technology will also ensure that the agency continues to deliver the same level of attention to long-time customers. Study after study concludes that it is much less expensive to retain a customer than to acquire a new one, so don’t let rapid growth cause the agency to cannibalize loyal, long term clients.

Staying alert to red flags
During periods of rapid growth, it can be easy to get caught up in the momentum and overlook red flags that foreshadow a problem. It’s important to maintain the disciple of regularly reviewing the book of business. Routine reviews can alert the owner to a book that is too weighted in one particular area or concentrated too heavily with one carrier.

Maintaining a diverse book of business makes it easier to avoid seasonal or economic fluctuations that can impact performance and profitability. For example, a book of business too heavily weighted in agriculture may make the agency susceptible to seasonal cash flow variations. Likewise, too much concentration with one carrier can create a liquidity crunch if the carrier changes the compensation structure.

Reconcile accounts received from carriers against commission statements. Although this seems like a natural function, it’s surprising how many agency owners don’t perform this task. Compare the two and account for any adjustments that may have been made, such as changes to policies or lapses in coverage.

Investigate any significant change in commission checks. Don’t accept it as a fluke if a large check arrives one month followed by a much smaller one. Contact the carrier with questions. Was a change made to policy premiums that may have impacted renewals? Did an accounting error occur? It’s easier to solve problems sooner rather than later.

Outsourcing specific functions, planning for capital growth, ensuring capacity and continually staying vigilant to potential problems are not fun or glamorous functions of running an agency. However, these long-term strategies are what differentiate the 20 percent of top performers from the rest of the players and truly define a “management mentality.”

Rick Dennen is president of Oak Street Funding, a commercial finance company that provides capital to insurance agents, agencies and carriers in order to expand their business and increase sales. www.oakstreetfunding.com.