Minding Your Business: Agency Financial Management 101

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 assist 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, may get a little arrogant and 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.

Today, firms have fewer dollars available due to lower commissions paid to agencies, continued soft market conditions and increased 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 pay them each above-average salaries, because they work toward hiring the best.

Profit centers are a key financial tool used by high performing firms. This accounting technique provides owners with 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.

The collection practices in well-run agencies are streamlined, enabling the firm to earn more investment income. Putting smaller commercial accounts on direct bill 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 never be allowed.

Capital expenditures should be made by investing in better people (both technical and sales persons), 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 personal 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.

Financial management starts off with efficient analysis of revenue, expenses, assets and liabilities.

The agency owner’s 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 they are expected to perform. Contact Oak & Associates for the Accounting Manager Job Description/Financial Review Checklist.

All management decisions should be made with a focus on how these decisions will affect 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. Share this article with a colleague.