Sometimes ignorance is bliss and it may seem like what you don’t know can’t hurt you. But being in the dark when it comes to agency finances can and should be very scary. In the midst of an economy and a market that will always be somewhat unpredictable, insurance agency owners should have a strong understanding of their cash flow and take proactive steps to effectively manage their money through good times and bad. You can avoid dark situations for your agency by implementing best practices.
Develop a plan. While an agency’s profitability is important, cash impacts the ability to operate; to access credit for growth investments, debt consolidation or reduction; and to position an agency for sale when the time is right. Now is always the time to develop a plan to ensure a healthy business cash flow. A plan allows owners to track expenses and look for potential issues early on to avoid shortages and to ensure adequate cash flow. In addition, planning will help businesses spot the need for a business loan, line of credit or other sources of working capital to enable business continuation and growth.
Know the healthy ranges for financial ratios and strive to achieve them. Credit is very helpful in the right situations and it often is necessary, but some businesses have taken on too much debt and they have little cash. Be cautious about large real estate transactions, over-valued business acquisitions and using credit cards to regularly cover operating expenses. By adopting conservative fiscal policies and making decisions that align with proven business finance guidelines, you can reach a strong financial state.
Keep personal spending in line. Spending to support an owner’s lifestyle and habits can take its toll on a business. Elaborate vacations, extra vehicles, higher mortgages and other pricey perks have been the downfall of many agencies and brokerages. This is because funds are drained to increase a principal’s salary, sometimes causing the need to secure unnecessary debt to fill financial gaps. At the risk of depleting cash flows, owners should avoid over-paying themselves despite success and growth.
Stay current on tax payments. Even though owners may need to be slow to pay themselves, the opposite holds true when it comes to Uncle Sam. The failure to set aside taxes each month comes back to bite too many insurance agencies on tax day of each year. Consequently, cash flow suffers when owners are faced with a huge tax bill. Sometimes, their budgets can’t withstand the expense and they end up with tax liens. Resist the temptation to divert tax money to other areas for other purposes, even in difficult financial times.
Resist investment traps. Decisions to grow through additional producers, new technology, marketing consulting and other strategies must be weighed from financial and timing perspectives. Have the strategies, services, products or people been proven to produce tangible results? Are there guaranteed metrics? There are far too many stories of businesses depending on the promises of excellent leads, promising sales people or sophisticated systems, only to see thousands of dollars wasted. Sometimes the problem isn’t the investment itself, but the absence of an adequate plan or poor execution of a plan. While investing in growth isn’t really an option, it’s critical to get concrete proof of expected results and to avoid getting locked into large long-term payments that hurt cash flow.
Finally, insurance agencies must have an annual budget that guides operations and decisions. Especially in times of economic uncertainty, many businesses function like many people — paycheck to paycheck — without a plan or regular evaluation of financial health. Owners can make a big difference by comparing budget numbers to actual numbers each month to identify important trends. If, for example, income is rising faster than expected or commissions are taking longer to arrive, the budget can be adjusted accordingly for the next few months to ensure adequate cash flow. If costs are trending higher than planned, receipts can be reviewed to determine where money is going. Without a plan and regular monitoring, cash flow is almost certain to suffer. A plethora of resources are available to help, including software and accountants, and you don’t have to spend a fortune to access them.
The content of this article originally appeared in the March 2013 edition of Rough Notes Magazine in an article titled “Financial Wisdom in Today’s Economy.”
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