Tax time isn’t the only time insurance agents need someone to look at their books. Business owners should be informed monthly of their tax liability. In fact, agencies can benefit from having someone offer week-to-week financial advice.
Good financial management is a component of any well-run business. This includes documenting records properly and creating management reports that are accurate, relevant and timely.
Commissions represent the revenue earned based on the premium paid by the customer to the insurer on new policies/renewals. Records need to be kept on policies sold to be sure that they are included in the commission remittance from the insurer. This is a good way to keep aware of cancellations by the insured that reduce payments.
Payments from the insured are made to the insurer and based on those payments. Commissions are paid in most cases monthly to the agent. While most small agencies use the cash basis for tax purposes, they should maintain their books on an accrual basis. That means revenue is recognized in the period in which it is earned, while insurer payments will likely be received in the following period.
Where commissions are paid in a lump sum, the amount received must be charged to a deferred revenue account, (a liability account) and a portion of it recognized in each period as it is earned. Both accounting methods will provide a more accurate picture of how the company is doing financially.
Cash
Working capital is the lifeblood of every economic entity. For agencies, the revenue stream or cash receipts is almost guaranteed. Without proper cash management, including a cash flow forecast, a company can run out of cash. Maintain enough working capital to cover two months of operating expenditures.
A cash flow forecast begins with the cash balance, plus all expected receipts from operations, less costs of operations. It is important to recognize the difference between operating expenditures and non-operating expenditures. A non operating expenditure may be the acquisition of an asset such as a building or a piece of equipment.
Financing
Small agencies should stay away from bank lines of credit unless there is a compelling reason to obtain one. Lines of credit make it easy to spend cash that is not earned in the normal course of business. However, if the purchase of a fixed asset is required, then a term loan secured by the asset would make sense.
Expenses
The single largest expense for an agency is the total cost of employee. Owners often look at the wage of an employee and don’t consider payroll taxes, benefits (such as paid time off) and group insurance. Perks such as auto, gas or entertainment may also be included.
Analysis must be done on those expenses to ensure they are in line with other companies of similar size in the industry. The analysis is done by creating benchmarks (available from industry associations) that determine such statistics as revenue per employee, per square foot, clients per sales employee, etc.
It’s important to recognize that owners are employees too, and have a responsibility to the company. Care should be taken to avoid excessive perks, such as excessive salaries, expensive cars and including non-performing family members on the payroll.
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