Why Cash Flow Outweighs Profits in a Tough Economy

Simple Steps to Improve Agency Cash Flow

Cash flow today is probably more critical to small businesses than anytime in 20 or maybe even 40 years. This is especially true for agencies. I have seen many articles written about agencies cutting expenses, but for many agencies, cutting expenses is not going to be enough. They need to improve cash flow. So how can agencies improve their cash flow? Consider the following ideas.

Increase Sales

The most obvious solution is to increase sales. Of course this is much easier said than done. Managing sales better without spending any more money is difficult and requires considerable discipline. In many agencies, it may even require a cultural change.

The best way to increase sales is to increase the number of qualified prospects in your producers’ pipelines. This means the producers must work harder and must be carefully managed. What systems, what management, what requirements do you have in place to make sure your producers are building fatter pipelines? I know many agency owners and executives dislike the idea of managing this process, but let’s face it, if voluntary participation hasn’t worked yet, it might be time for a pro-active approach.

Another great method for increasing sales is the strict use of coverage checklists. This costs an agency no extra money but always leads to additional sales. Additionally, it saves cash when errors and omissions (E&O) claims are avoided. Coverage checklists also set agencies and producers apart from all the peddlers. But completing checklists requires discipline and knowledge that are both in excess of what many people possess. This is why their use is such a competitive advantage.

Producer Compensation

Pay producers on earned rather than written. This is not a change that will quickly improve cash flow because contracts may have to be modified, advance notice given, and then there still will be a time lag. However, it is an important improvement to make for many reasons.

First, producers’ paychecks will correlate with agency income more closely.

Second, bad debt issues will decrease because producers won’t be paid if the agency is not paid.

Third, in some states, it may help prevent employment practices liability (EPLI) claims.

Commissions

If the agency has heavy commission months and really low commissions months, consider moving some renewals from heavy months to light months to even out cash flow. This may also work to your advantage right now because your customers may be able to renew their policies at a reduced premium. Additionally, the agency may be able to reduce staff without increasing staff stress or workloads. This is because many agencies staff based on their heaviest months. At the very least, the agency may be able to quit paying overtime during their heavy months.

Move Expenses

Move expenses to your better cash flow months. Obviously, an agency cannot move its utility bills to other months, but moving discretionary expenses to months in which your cash inflows are higher is a good move.

Cutting Expenses

Of course, cutting expenses should be considered too. But frankly, the simple stuff like cutting office supply expenses is never going to add up to enough to make a huge difference.

When cutting expenses too many agencies simply start cutting staff without adequately assessing where the inefficiency exists. Before cutting staff, make sure your producers are doing all they are supposed to be doing. Agencies cannot afford deadweight today and in many agencies, there are vastly more deadweight producers than deadweight staff.

Similarly, agencies should not cut good producer’s compensation unless absolutely necessary and the agency can successfully sell the producers on why it is in their best interest to accept the cut. A number of agencies seem to be getting advice to cut their producers’ compensation as if there will be no repercussions. This may be why I am seeing more producers willing to leave their agencies to move to greener pastures elsewhere.

Reduce Partnerships

Cut the number companies and brokers the agency represents (within reason). Every study I have ever seen shows agencies are more profitable when they represent fewer carriers. A main street agency doing less than $10 million in revenue does not need 30-plus carriers and another 20 or more brokers much less 50 or 75 or even 100 like I have seen. Twenty carriers and 10 brokers should be more than sufficient.

Too many agencies lack discipline in this area or they treat company appointments like hunting trophies to adorn a wall (i.e., all the company plaques hanging on walls including the companies the agency no longer represents). The optimal number of carriers, not too many and not too few (and this number varies by agency), results in greater efficiency which saves staffing cost and improves revenue. This gives the agency the best of both worlds for increasing cash flow.

Trust Accounts

A dangerous trap to avoid when cash is short is to not dip into your trust account. Under no circumstances should an agency ever let its trust ratio decrease below 1.0. So if your agency is running short one month, it is much better to take a loan out or draw upon a line of credit than it is to spend cash that is supposed to be held in trust. It may seem easier to use that cash and maybe even cheaper, but it is not. Eventually that cash must be repaid on an after-tax basis. The cost of capital is huge. At least the interest on a loan is tax deductible and it is legal. Using trust money is never legal.

Cash and cash flow are king today. The agencies that have cash and good cash flow have fantastic opportunities to build their agencies. Those that lack cash and adequate cash flow may have no future at all. Taking steps today to increase cash flow may save your agency tomorrow.

Topics Profit Loss Agencies