Avoid These Easy-to-Make Mistakes in Tracking Agency Income

As an agency owner, your days are spent juggling myriad responsibilities to meet your clients’ needs and support your employees. And although you’re likely to be on top of your agency’s general financial state, you may not have time to dig deep into your balance sheet and income statements, especially if they’re managed by an employee or CPA.

When working with insurance agencies to support their growth, we’ve found that a surprising number of agencies — of all different sizes — don’t maintain an accurate and current balance sheet. Not only is this information important when seeking capital, but it’s also essential when it comes time to sell your agency or transfer it through a family succession plan. The balance sheet helps inform and calculate an accurate valuation.

What Makes Agencies Unique?

Proper balance sheets for insurance agencies are different than those used for businesses with more straightforward income and outflow utilizing either a cash or accrual accounting method. There are two primary categories that most agencies fall into:

If your entire book of business is comprised of policies that are direct-billed by the carriers, you can use a fairly “normal” cash accounting method if — and only if — you don’t post the entire premium amount as revenue. Only your agency’s share of the premium should be attributed to agency income.

If your insurance agency invoices your customers and accepts money for premiums from the position of a fiduciary trust, your agency is responsible for the money — but the full amount should not be counted as income on an income statement. This is due to the difference between money owed to the insurance carrier versus revenue for the agency.

Here are two essential things to remember in order to properly account for your agency billed funds:

• Track what you have billed, but not yet collected from customers.
• Track what you’ve collected, but not yet remitted to carriers in these situations.

Because of the potential complexity of maintaining an accurate balance sheet for insurance agencies, it’s important to work with an accountant that understands the nuances of getting it right or use financial software designed specifically for the needs of an insurance agency.

This will give you peace of mind when reviewing your balance sheet, as well as put you in a good position if you decide to sell your agency or when you’re ready to seek capital. We’re always here to answer your questions and provide guidance on helping your insurance agency thrive.

NOTE: This article provides general educational information and isn’t intended to provide accounting, legal or financial advice. Each individual and agency have unique circumstances and needs. Contact your accountant or attorney with guidance for your specific situation.