While the topic of having the right amount of working capital is relevant year-round, January is an ideal time for insurance agency owners to take a fresh look at working capital needs and funds availability.
Find Your “Why”
Evaluating your annual P&L statement may give the perception of healthy finances. Yet, your agency may struggle with cash flow throughout the year. That’s why it’s crucial to identify cyclical patterns for the “when” and “why” of your cash flow crunches. Some of the most common causes of predictable fund depletion include:
- Commission timing
- Carrier remittance schedules
- Payroll
- Tax obligations
- Fluctuating
- Marketing investments
- Seasonal swings in customer demand
- Software as a Service (SAAS) subscriptions
After quantifying the “whys,” plug those items and amounts into your monthly budgeting model to allow you to see when the deficits occur. The next step is to assess if your existing capital can carry you through those crunch times.
Capital Benchmarks
Financially healthy insurance agencies often aim to have working capital to cover three to six months of operating expenses. This range provides flexibility to withstand revenue dips, anticipated expense spikes, and unexpected expenditures while also supporting growth initiatives.
Compare this calculated amount of needed working capital to the month when you typically experience the greatest disparity between cash and expenses. This will highlight if having three to six months of cash on hand is enough to weather the seasonal ebbs and flows of your agency’s income and expenses. Agencies with higher fixed costs, rapid growth plans, or heavy reliance on contingent commissions may have greater need for working capital.
Liquidity Quantity and Quality
Moving beyond the amount of money needed, liquidity quality should also be evaluated. Cash and near-cash assets should be readily accessible (without penalty), rather than tied up in long-term investments, physical property, or delayed receivables.
A strong current ratio and consistent positive operating cash flow are often better indicators of financial health than profit alone. Working capital absorbs timing mismatches by ensuring that your agency can meet its obligations without deferring investments or stretching payables.
Your January Jump Start
For many agencies and owners, January offers a clean start and renewed energy to chart a solid course to success — resulting in less stress throughout the year. Evaluating your anticipated working capital needs now gives you time to adjust expense structures, plan marketing needs, build reserves, or secure credit proactively rather than reactively.
Agencies that start the year well-capitalized are better positioned to invest, grow, and weather uncertainty, regardless of what the year brings. At First Mid, our agency finance specialists can support your need for working capital or an agency line of credit. You can email us at agencyfinance@firstmid.com, call 877-894-2785 or fill out this online form to request information.
Wishing you and your agency teams a prosperous and healthy 2026!
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