Planning ahead requires an understanding of where you are now, how you got there, what works, and what doesn’t. After that, a road map to the future can be drawn.
To help with your agency’s business planning efforts, try developing a one-page business plan by reviewing five areas.
Part one of this two-part article series reviewed the first two areas in developing this one-page business plan: book of business and sales (see the February 23 issue of Insurance Journal magazine).
Part two will review the last three areas: financial performance, employee productivity, and market relationships.
Financial Analysis
The beginning of the year is 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 accounts 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 is the reason? Sometimes the change is because of a non-recurring event or a discretionary item. The real problem is if the situation has gotten progressively 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, 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% of the revenue.
Next, look at the following balance sheet ratios: trust ratio (cash plus receivables divided by company payables), collection ratio (receivables divided by premium payables), and the current ratio (current assets divided by current liabilities).
Review the aged receivables report. How good are the agency’s collection practices? Many firms are moving more to direct bill to avoid collection hassles, but then they should not follow up on late payments. Collections are the carrier’s role for direct bill.
In the Financial Review box of your one-page business plan (see February 23 issue), write down the total revenues and expenses for the agency for 2025. Also, write down the total compensation to the owners (salary, commission bonuses, perks, etc.). Next to those numbers write down your projections for the next two years. Below that list, write down two or three problem areas for the agency that you have noticed 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.
- Commissions and number of accounts each account manager handles.
It is important to begin the review with the big picture. Calculate revenue per employee, per account manager, and per owner/producer. Keep in mind not to use the job titles but the percentage of time that the employees spend in each category. If a producer spends a third of their time doing traditional service work, then they count as 33% of an account manager role and 66% as a producer.
Next, narrow the scope down to commissions per account manager and accounts per account manager. This should be broken down by line of business if the account manager handles more than one line.