What makes the difference between an average agency owner and a great one? The key is to learn the skills of financial management.
It often happens that consultants are called in to help owners with financial problems. Some owners have left this financial management function to an agency employee, such as an accountant, or to a partner who may have assumed this task by default. Often other owners trust this person to handle everything with very few checks and balances in place.
Agency owners often start out as producers for another agency. The step to ownership occurs after many years of selling insurance. Producers may be frustrated working for others, decide to quit and start their own business.
The management skills required for the role of owner are usually learned on the job rather than through formal training. Owners who do not take on the various management tasks will tend to ignore functions that they deem to be a burden or a necessary evil.
Accounting and financial management tasks in a business tend to suffer from owner indifference, fear and ignorance. And, if so, smart agencies hire the right chief financial officer (CFO) or chief accounting officer to fulfill this role, reporting to the owners.
Importance of financial management
Businesses today have less money due to lower commissions paid, cyclical market conditions and increased expenses. These pressures make managing the company’s financial affairs even more critical.
Effective financial management is necessary to provide owners with the same personal income and value for their shares as in the past.
All well-run businesses exhibit certain characteristics of financial management. Financial management begins with an effective analysis of income, expenses, assets and liabilities. The periodic review of financial statements should include comparisons in three areas:
- Past performance;
- Future budgets; and
- Industry standards.
The well run business always displays good control over all expenses. Compensation expenses (which make up two-thirds of all expenses for an average business) are scrutinized. The best companies run “leaner and leaner” and will have fewer employees, but might pay them each above-average salaries. These companies strive to hire the best.
Use profit center accounting
Profit centers are a key financial tool used by successful companies. This accounting technique provides owners with very relevant information, such as the source of income, expenses and profits.
Profit center accounting should be done by line of business as well as within lines (such as small business accounts), where possible. Separate income and expense statements can be easily produced for each profit center on most agency management software systems.
Direct expenses should be allocated to each business line. Allocations can be easily determined by management for indirect expenses (especially for owner compensation and bonus, IT and accounting expenses) based on time used or percentage of total revenue for that area of business. activity in relation to the company’s total commissions.
Collections practices in well-run agencies are streamlined, allowing the business to earn investment income. Putting many business accounts on direct billing, especially small accounts, will eliminate staff costs to manage billing and collections from small accounts.
A rigorous collection policy must be put in place. Exceptions to policy, such as advancing premiums on behalf of clients, should rarely be permitted.
Capital expenditures should be made by investing in better people (both technical and sales), good IT systems, efficient office equipment, and funds for sales tools, such as targeted marketing.
This allows owners to create future value rather than reaping short-term gains through bonuses or by taking out as much profit as possible. Owners who do this are essentially selling the value of the business to themselves by not reinvesting in the business.
Strategically manage the business
The role of owners in most medium and large businesses should be strategic rather than focused on day-to-day tasks. The accounting/bookkeeping employee will perform all necessary duties, including preparing reports for management. The accounting manager’s job description should include a checklist of all the typical tasks he or she is expected to perform. (Contact Oak & Associates if you would like an accounting manager job description/financial review checklist.)
All management decisions should be made with an emphasis on how those decisions might affect the value of the business. This type of guidance helps management choose the direction that will ultimately lead to more money for their retirement, either selling their stock internally, merging it with another company, and/or eventually selling the company to a third-party buyer.
The most important insurance news, delivered to your inbox every working day.
Receive the trusted insurance industry newsletter