Financial Management 101

September 16, 2019 by and

Typically, financial management is learned on the job rather than through formal training. Agency owners frequently start off as producers, so selling is their strength, not dealing with credits and debits. It is not unusual for some business owners to dread handling the accounting for their firm. However, it is not good to let accounting and financial management tasks in a firm to suffer because of owner indifference, fear and ignorance of the subject.

An agency needs to be financially sound for its clients, carriers and employees. There can also be a selfish reason: sound financial management is necessary to provide owners with their personal income and enhance equity in the business.

Basic financial management is easy to learn. Once a system is set up, there’s not much to financial management. The key is to develop a system that will be used and not ignored or misused.

A good accounting system is accurate, easy to use and quickly understood by an outside party. The most robust accounting system is integrated with the agency management system. This allows management to see the relationship between the agency’s finances, client accounts, policy premiums and agency commissions.

Software like QuickBooks or Excel can be used by small agencies that are mostly on direct bill. But those methods don’t work well when handling fiduciary funds (i.e., agency bill) and there can easily be a disconnect when trying to reconcile the financials to the book of business.

An agency should have both an “operating account” for agency money and a “trust account” for client money, regardless of local and state requirements. This clarifies the handling of fiduciary funds and helps to avoid the error of showing premiums received as agency income.

In a small agency, the owner should be able to handle the accounting, or perhaps use an outside bookkeeper to enter the data. In most medium to large firms, the agency owner’s role should be strategic, not centered on day-to-day tasks.

The owner should focus on monthly or quarterly reports and review budgets. Management should make all decisions based on how they will affect the value of the firm. This focus helps management choose the direction that will lead to more money for their retirement from either the sale of their stock internally, the merger with another firm or the eventual sale of the firm to a third-party buyer.

The employee handling the accounting/bookkeeping will perform the necessary day-to-day functions, as well as prepare reports for management. We recommend that a checklist be created of the typical tasks that person is expected to perform.

The following is a brief list of key items to include on all checklists. Some accounting tasks might be handled by the service staff rather than the bookkeeper, such as issuing agency bill invoices.

  • Issue client agency bill invoices.
  • Record and reconcile customer accounts receivable.
  • Handle bank deposits.
  • Record and pay agency bill premiums to carriers.
  • Record and reconcile direct bill commissions.
  • Review vendor bills and handle disbursements.
  • Process payroll.
  • Calculate producer commissions.
  • Handle collections of A/R over 60 days.
  • Review bank accounts and cash position.
  • Reconcile all bank accounts.
  • Verify all payroll taxes were paid.
  • Run balance sheet:
    • Review cash position;
    • Review receivables and payables;
    • Calculate ratios: trust, current, etc.
    • Review and correct 60-plus days receivables.
    • Run monthly and year-to-date income statement:
    • Compare statement to last year, the budget and industry standards;
    • Analyze any deviations.
    • Make quarterly tax payments.
    • Perform the following additional analysis to quarterly income statement:
      • Calculate changes from prior quarter and last year (net change and percent change);
      • Estimate projections for the next quarter for revenues and expenses;
      • Calculate net profit and make recommendations how much should be reserved;
      • Review investments and debt liabilities.