Although insurance agency owners don’t need to worry about inventory management or supply chain issues like certain other small businesses, they do have one challenge in common: cash flow management. In face, cash flow is one of the top reasons for small business failure.
The Lifeblood of Your Agency
Maintaining adequate cash flow is essential to your agency’s health, as well as its ability to thrive and grow long-term. Before we dive in, let’s start with the basics.
Cash flow adequacy is the ability to have enough cash and cash equivalents to pay your current bills each month without draining your resources – and ideally even putting money aside for future investments into your business. We’ll look at both the external pressures and the agency habits that affect cash flow management.
External Influences
In addition to the effects of the overall economy on business expenses, staffing costs and client purchasing power, there are a few industry-specific issues you can attempt to manage by delivering superior customer care. Help them understand the market issues that are impacting them, while also educating them about the choices they have to meet their specific needs.
Being proactive in your conversation with a customer who’s been hit with rising premium costs is important. It’s not enough to simply say “All insurance companies are raising premiums.” Guiding them to understand the importance of their coverages and the potential impact of reducing coverages can aid in customer retention.
Agency-Controlled Impacts
You can put some guardrails in place to ensure your expense load is rightsized to what the overall economic and carrier environment is. Each of the following 10 habits can positively affect cash flow and lead to a strong bottom line.
- Plan for seasonal trends and cyclicality. It’s important to accurately recognize and address revenue and expense trends, whether they’re based on policy renewal cycles, lower sales for certain product lines during specific times of the year or other factors. Although you may be profitable on a year-over-year basis, monthly cash flow may vary as income and expenses are unlikely to be consistent ever single month. Plan for peaks and valleys of both revenue and expenses.
- Forecast your cash flow. Put a very detailed budget together both for revenue and expenses and compare it monthly to what actually occurred. Dig in to why each line item varied from the budget and adjust next month accordingly. Plan for periods where revenue and costs may be cyclical. Consistently measuring and assessing will help you know your costs.
- Manage overhead costs. Although a certain amount of overhead can’t be avoided, it’s important to analyze your overhead at least once per year. You may be continuing to pay for two different security systems or have other redundant spending. Perhaps your office rent has increased drastically and you could reduce costs by moving to a more affordable office location. Regularly look for areas to “trim the fat.”
- Manage growth efforts. Expanding your agency won’t happen overnight and requires strategic decisions that identify your growth goals, establish your marketing budget and outline your plan of attack. Overly optimistic growth and ROI projections can have you dipping too far into your financial reserves.
- Maintain and review monthly financial statements. Whether you’re the one who handles the books or you have an employee or outside firm who manages your agency financials, make sure your financial statements are always current and that you take time to review them each month. Like the budget, timely review of financials will aid in better decision making. You’ll also be more prepared should you seek capital from a financial institution.
- Establish checks and balances. If you have a staff member or vendor who is responsible for accounts receivable, accounts payable, taxes, premium remittance and other related items, you need to have a system of checks and balances in place. This can protect your agency against fraud, embezzlement and redundant spending.
- Make wise staffing decisions. Many small business owners try to do everything themselves leading to exhaustion and things slipping through the cracks. If you are a producer in your agency, it can also lead to a reduction in your personal production. Hiring or outsourcing needs to be approached strategically. Evaluate your needs and the goals for the new hire. Be realistic about the ramp-up time and experience needed for each position, and plan for the cost until the new hire is producing revenue or efficiently supporting revenue building activities.
- Establish sufficient cash reserves. Although this seems obvious, it’s easy to overlook it when day-to-day needs demand your attention. Strategically building up cash reserves can position you to be ready when you want to upgrade equipment, make marketing investments or increase staff.
- Protect against attrition. Customers can be fickle. Ensure strong customer relationships are established with multiple people in the office to protect against attrition when an employee or producer leaves.
- Practice effective credit management. Manage the level of debt you put on the agency. Credit is a tool that can be used appropriately to support agency growth and make wise investments but beware of overleveraging. Instead of relying on credit cards, establish a business line of credit. Having credit readily available can allow you to take advantage of strategic marketing opportunities or hires. Your banker can help guide you.
Implementing the above habits will aid in understanding and managing the cash flow of your agency, which is vital to your survival and growth. If you’d like to talk more about how to manage your cash flow and access a line of credit, reach out to our consultative staff by calling 877-894-2785 or emailing us at agencyfinance@firstmid.com. We look forward to supporting you and your agency!
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