As an insurance agency owner, you juggle numerous responsibilities every day — meeting client needs, supporting your staff, developing referral sources, and staying on top of agency finances. One of the most important aspects of your agency’s financial health is your working capital. We break down what it is, why it matters, and how to make sure you have enough.
What is Working Capital?
Working capital is the money you have available to run your agency on a day-to-day basis. The amount of working capital you have is calculated by subtracting your current and upcoming liabilities from your liquid assets.
Business owners who use the “checkbook method” of handling their finances spend money based on what’s in their bank account at any given time — essentially using their working capital without thinking about the big picture. While this may work short-term, it can create cash-flow problems in the long-run because there are peaks and valleys in both revenue and expenses, and it doesn’t prepare you for the unexpected expenses that come up occasionally.
That’s why it’s wise to take a closer look at how much working capital you HAVE versus how much you NEED.
What Factors Affect Working Capital Needs?
As a sales and service business, the large expenses that must be considered when looking at your working capital needs likely fit into the following categories:
- Payroll and Benefits: An engaged and skilled staff is essential to making any business function smoothly. It’s critical that you meet payroll deadlines on time. You may also have workforce training, health insurance, and payroll service expenses.
- Accounts Payable: This includes fixed costs (such as an office lease, utilities, and internet access) and less consistent expenditures like office furniture, mileage reimbursement, client meals, and other items that fluctuate month-to-month.
- Taxes: It’s important to pay federal, state, and unemployment taxes on time and in the correct amounts. Fortunately, you are unlikely to need to pay any retail or sales tax. Paying the proper amount of tax on time eliminates stress, helps you avoid penalties, and reduces the likelihood of messy issues with tax-collecting bodies. If you have any doubts about tax schedules and amounts, bring in an accountant or tax specialist to provide guidance for your specific situation.*
- Marketing Expenses: Depending on your location, agency size and goals, product lines, stage of growth, and available co-op advertising funds, your marketing approach and costs will be unique to your business. And while seasonally strategic marketing activities are appropriate, marketing isn’t something you should think about only a few times a year or when you start to panic about revenue. Like payroll, marketing strategies and related costs should be constantly updated based on what’s providing you with the best return on investment.
- Emergency Reserves: The amount of emergency funds you need to account for in your working capital is contingent upon your risk level for various incidents. For example, if you lease your office and all major repairs (plumbing, roof, HVAC, etc.) are covered by the property owner, you don’t need to include those expenses in your emergency fund estimates. However, you would want to anticipate a need for equipment replacement, potential IT costs, damage from natural disasters that aren’t covered by a landlord or insurance, funds to cover the death or disability of a major producer (unless you have disability insurance and/or key person coverage), or other unexpected expenses.
What if Your Working Capital Falls Short?
Agencies that don’t have sufficient working capital often turn to credit cards to handle emergencies or cyclical shortfalls. This is a costly way to address large expenses since interest rates can be high, and it will affect your credit utilization levels which impacts your credit score and borrowing capacity.
Although it’s not unusual for small business owners to use a credit card for an emergency, some agency owners get in the habit of pulling out their credit cards for other working capital needs, including those that can be anticipated. This can create a long-term financial liability that grows exponentially. Fortunately, there is an alternative. Choosing a short-term loan structured for your needs, revenue, and goals can be a more cost-effective way to handle shortfalls in your working capital. This approach provides agency owners with the following benefits:**
- Lower interest rates for qualified borrowers.
- Less money spent on interest overall can help fuel growth.
- Repayment timelines that fit your needs and financial situation.
- Insight from a specialized agency lending team, rather than the transactional nature of credit card usage.
At First Mid, we are proud to support insurance agencies throughout every lifecycle, including those times when you need access to working capital to help your business thrive and grow. Please contact us today or get to know our consultative agency finance team.
* This information is being provided as a courtesy and should not be considered tax or legal advice. Please consult your own tax advisor, attorney or other appropriate professional to address your unique situation.
** The benefits of a working capital loan are based on qualified applicants being approved. This is not a guarantee or commitment of loan approval.
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