Business Planning in a Snap!

The fall is a good time to plan for the New Year by reflecting on how the agency has been operating over the past year. Operations may need to be restructured to the way it should be run in the coming year, especially with the continuing soft market. What better way to start off the New Year than with a short and concise business plan? To make sure this plan gets done, Oak & Associates has 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: 1) book of business, 2) sales, 3) financial performance, 4) employee productivity and 5) market relationships.

Use a single sheet of paper and draw a vertical line down the middle and two horizontal lines to split the page into thirds. The paper will now have six equal size boxes. Prioritize the list of five areas of primary focus (book of business, sales, etc.). Write the top two topics on the top of the top two boxes, the next two topics on the top of the middle boxes and the fifth topic on 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.

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, however it is also riskier. If the agency has a lot of small accounts, the procedures in place for selling and servicing them are critical in order 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. 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 $30,000 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 less than 25 percent to 33 percent costs 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 just do not approach businesses that match-up with the products the agency has expertise writing, or may not approach markets competitive for those classes of business. Use 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 percent or less attrition for the typical property/casualty insurance agency. Higher attrition is usually an indication that the business the agency writes is transient; 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.

Next to those numbers write the target for next year.

Below that list, write two or three actions that need to be accomplished to reach those sales goals.

Financial Analysis

The beginning of the year is also a great time to check the agency’s financial performance. It is relatively easy and it will need to be done for taxes anyway. For the financial review, income statements and balance sheets are needed. Don’t forget to obtain the summary accounts receivable and account payable reports.

First look at the changes in revenue and expenses compared to prior years. Have they gone up or down? What is the percentage of the change in each category? If there are major changes, what was the reason? Sometimes the change is because of a non-recurring event or a discretionary item. A real problem may exist if the situation progressively gets worse over the years. Subtle changes each year can add up to a big change.

Is the agency spending more or less for each expense than its peers? Make sure that the peer group used is a fair comparison. Use a benchmark that is for agencies of similar size, book composition (personal lines, commercial lines, life and health), size of account and if possible, geographic region. If the agency is significantly different from its peers, why is it so and should there be any adjustments made to the operation?

What is the bottom line? Is the agency profitable? A good rule of thumb is the total return for the owners and producers (compensation, perks and profit) in an agency should be at least 50 percent of the revenue.

Next take a look at the following balance sheet ratios:

• Trust Ratio (cash plus receivables divided by company payables);
• Collection Ratio (receivables divided by premium payables) and;
• Current Ratio (current assets divided by current liabilities).

Review the receivables report. How good are the agency’s collection practices? Many firms are moving more and more to direct bill, to avoid collection hassles, but then should not be following up on late pays. Collections are the carrier’s role for direct bill.

In the financial review box, write down the total revenues and expenses for the agency for 2008. Also write down the total compensation to the owners (salary, bonuses, perks, etc).

Next to those numbers write down projections for the next two years.

Below that list, write down two or three problem areas for the agency with the analysis, such as poor collections or higher than average rent expense. These will be the issues that need to be resolved by the end of the year.

Productivity Analysis

The next area to look at is employee productivity. The following information is needed:

• An employee list, including the percentage of time each employee (and owners) spends on production, service, administration and management;
• Compensation for each employee and;
• Commissions and number of accounts each CSR handles.

It is important to begin the review with the big picture. Calculate revenue per employee, per CSR, and per owner/producer. Keep in mind to not use job titles, but the percentage of time the employee spends in each category. If a producer spends a third of their time doing traditional CSR service work, then they count as 33 percent of a CSR and 66 percent as a producer.

Next, narrow the scope down to commissions per CSR and accounts per CSR. This should be broken down by line of business if the CSR handles more than one line.

Compare CSRs to each other and the agency’s performance to its peers. There may need to be some subjective adjustments.

For example, a CSR may have moved a book of business from one carrier to another. Also, some types of business may be more complicated and service intensive than other types and this could affect performance if a CSR’s book is heavily niched.

In the box marked employee productivity, vertically list the current revenue per employee, average commission and number of accounts handled by the CSRs by line of business (commercial lines, personal lines, etc).

Beside those numbers, write down the projected goals for next year.

Below that, list two or three action items that need to be accomplished to reach those goals. This may include computer software or more training for the CSRs, for example.

Market Relations

If the current hard market does or does not continue, carriers may make some changes, such as changing profit sharing agreements, tightening up or loosening some underwriting or pulling out of certain markets. Today’s agents and brokers need to have a clear understanding of what carriers can do for them and how this fits into the overall agency plan.

Run a list of all of the carriers with volumes, commission rates (or commissions), loss ratios and contingents received. Analyze how the agency’s book of business stacks up with the existing markets. Compare all the carriers and their products against what the agency has with the top five or 10 industry groups the agency writes.

Some of the questions that should be asked include:

• Will volume commitments be met and how will it be done?
• Are there new markets the firm should seek out?
• Is the volume spread too thick or too thin?
• Is the agency maximizing profit sharing agreements?

In the box marked carrier relations, list the five most important markets (not necessarily the largest) and the agency’s volume with them. Write realistic agency productions goals for the next year beside those numbers. It’s best if you start the planning before carriers dictate what they expect for your agency.

Next, list one or two markets that you do not have, but feel the agency could use. Write down on one side of those names the dates you will approach them.

Finally, list two or three markets the agency has outgrown and should get rid of.

The Final Ingredient

The last box can be used to write out the goals for any other key area for the agency. This could include automation, personnel changes, workflow issues or management issues.

Why You Need to Do This!

Competition is keen. The continued soft market cycle continues to cause havoc and agency value is at stake. This annual planning process and self-assessment is the key to success. If management does not know where they are, how can they possibly plan for tomorrow and know how to get there?

This simple planning technique can be done in less than a day. Through delegation, if time permits, each box in this plan can be expanded into several pages of a complete business plan. The beauty of the one page plan is that it can be kept in management’s day planner and scanned for easy reference. Business plans need to be reviewed at least once a quarter.

These goals should also be shared with middle managers, producers and of course, the rest of the service and administrative staff.

Oak & Associates suggests an off-site planning meeting held at least once a year. Having an independent third-party facilitator can also assist in achieving this plan more quickly, help in the brainstorming of the plan and help the firm reach its goals.

The man without a plan is simply lost, like a rudderless ship. Make a choice. Take the time to plan ahead and be successful.