Business Planning in a Snap: Part One
If the firm’s business planning is not complete, this is a good time to plan by reflecting on how the agency operated over the past year. The holidays are over, and end-of-year financial results are completed. Operations may need to be restructured to the way it should be run in the coming year, especially with a changing market. What better way to start this year than with a short and concise business plan? To help the agency’s planning efforts, here’s a formula for a one-page business plan that can be done in no time at all.
Where to Start
Planning ahead requires an understanding of where you are now, how you got there, what works, and what does not work. Once the current status is defined, then a roadmap to the future can be drawn. The rule of this game is to keep it simple.
The objective is to review the agency’s performance and set future goals in five areas of primary focus: Book of Business; Sales; Financial Performance; Employee Productivity; and Market Relationships.
Using a single sheet of paper, draw a vertical line down the middle and two horizontal lines to split the page into six equal-size boxes. Prioritize the list of five areas of primary focus (Book of Business, Sales, etc.). Write the most important topics at the top of the top two boxes, the next two topics at the top of the middle boxes, and the fifth topic at the top of the lower left box. Leave the lower right box blank at this point. Now start planning!
Book of Business Composition
It is valuable to examine the composition of an agency’s book of business once a year. This is a great starting point since it defines the agency’s “personality.” The “personality” of an agency, in turn, will define what to expect in the other primary areas in the review process. For example, a large urban agency that sells only very large commercial accounts will have different expectations than a small-town agency that sells all lines of insurance.
Start by finding out what the split of business is along each line: personal, commercial, life, group benefits and program business, etc. Then calculate the average size of account for each line. Also, how much of the agency business comes from the top 10 accounts. Finally, analyze the distribution of business and identify the firm’s top five industries.
‘Planning ahead requires an understanding of where you are now, how you got there, what works, and what does not work.’
In the Book of Business box, vertically list the breakdown of the current book of business by line of business, top 10 accounts, and key industries. Write the current percentage of the overall book for that line of business, but leave room for goal setting.
Is the mix of business healthy for the agency? This is a judgement call for the owners. Niche selling is usually more profitable, but it is also riskier. If the agency has a lot of small accounts, the procedures in place for selling and servicing them are critical to make a profit.
It is important to distance oneself from the book of business and objectively ask the question: “Is this book valuable enough the way it is, or should its composition be changed?” If it needs to be changed, what should the agency target? This depends on the expertise of the producers and service staff, as well as the appetite of the firm’s current markets. Write down those future targets next to the current composition. This thought process is what separates the entrepreneur from the average person. Also, below that list write one or two actions that need to be accomplished to reach those goals.
Sales Review
It is important to review the new sales for the agency overall and for each producer. An experienced producer in a typical agency should generate at least $50,000 to $75,000 in new commission dollars each year, depending on their size of book. For large firms with large accounts, the amount could be much higher.
The hit ratio of each producer needs to be determined. Hit ratios that are less than 25% to 33% can cost the agency a lot of time and money. The technique of producers with low hit ratios needs to be checked and adjusted. Often, the producer fails to pre-qualify the prospect. Sometimes producers are just not approaching businesses that match up with the products the agency has expertise in writing, nor markets that are competitive for those classes of business. Use the successful producers as a model.
The agency may have tremendous sales, however, if there is loss of business through attrition, much of the effort for new sales is wasted. Calculate the attrition rate for the agency and each producer. The goal should be around 10% or less attrition for the typical property/casualty insurance agency. Higher attrition is usually an indication that the business the agency writes is transient and either the clients are price shopping or not good risks.
In the Sales box, vertically list the current overall hit ratio, average new business produced, and the average book of business in the agency. Write next to those numbers the target for next year. Below that list, write two or three actions that need to be accomplished to reach those sales goals.
Stay tuned for part two of this two-part series on Business Planning, which will feature discussions on Financial Analysis, Productivity Analysis, and Market Relationships.
Oak is the founder of the consulting firm Oak & Associates, based in California & Oregon. The firm specializes in financial and management consulting for independent insurance agencies, including valuations, mergers, acquisitions, sales planning as well as perpetuation planning. She can be reached at 707-936-6565 or by e-mail at catoak@gmail.com.