MAXIMIZING AUTOMATION

KEEPING BALANCED

Optimizing your agency management accounting system
by understanding its built-in balancing tools

By Wanda Shumaker

Ask your user group education director which training sessions are consistently well attended and the answer undoubtedly will be: "those addressing accounting issues." And while most of those attending the sessions have mastered the basic data entry tasks, they frequently misinterpret the "whole picture" due to a lack of understanding of the checks and balances available in their agency automation systems. The greatest confusion seems to stem from balancing receivables and payables to the general ledger totals. (The boxes on page 26 spotlight the most common balancing challenges and include suggestions for alleviating the issues. While the "how to" may vary from system to system, the basics should be generally applicable.)

Accounts receivable balance to general ledger

While this may seem like an obvious statement, many agencies still struggle to provide a supporting detail report that matches the total reflected in the asset list. Most of the major agency automation systems provide "real time" general ledger update capability that creates updates to the corresponding general ledger accounts at the time of invoice or payment. Thus, only a few if any "manual journal entries" into the general ledger accounts receivable number should be needed. In fact, doing so can cause an out-of-balance situation.

Regardless of the individual system specifics, understanding the flow of data from the invoicing process through to the general ledger is critical. It also is important to understand the nuances of the report modules because a slight modification in parameter choices can make or break your efforts to balance to a true month-end figure. Future billings are also handled in varying ways according to individual system, so it's important to understand that concept as well. Additionally, it is useful to know how to properly investigate and correct out-of-balance entries.

Company payables balance to general ledger

This issue is probably the most misunderstood and under-utilized feature of the agency management system. While most agency bookkeepers and principals understand the concept of a detailed report that balances accounts receivable to a general ledger total, the same individuals often are perplexed when it comes to doing the same with the company payable accounts.

Again, most systems utilize "real time" invoice-to-general ledger integration, making it unnecessary to "manual journal" anything to these liability accounts. There should be a standard company payable report that has a feature that shows the detailed items by carrier to support the entries in the general ledger company payable accounts.

For such a report to produce accurate results, there will likely be other processes that must be properly performed. Typically, some type of company statement reconciliation process must be done so that the report showing open invoices reveals accurate items. It also is possible that your system may treat "account current" contracted carriers differently than "pay by statement" carriers when it comes to reconciliation procedures.

Timing and invoicing procedures can hamper payable balancing efforts. The most common issue here typically involves policies written through excess and surplus lines brokers. Often, payment is expected "up front" to bind coverage, meaning the typical
45-day account current rule does not apply. Since there is no policy delivered at this stage, many account managers have been trained that this is a situation requiring a binder bill or "dummy bill." In either case, there is no payable entry to "flag," forcing a check to be written against a non-existent payable balance. The simplest solution is to redefine the workflow so that some type of actual invoice is done in these cases. A temporary binder number in the absence of a policy number usually will suffice.

Review the blueprint

In many agencies, the accounting staff has "inherited" the bookkeeping activities from someone whose responsibilities changed or who's no longer with the agency. If you were not present during the original activation of your agency management system, a refresher course on the basics can be enlightening. Often, a number of options are available to the agency regarding income posting methods, and how these options were exercised initially can have a lot to do with how data transfers from your client invoices to the general ledger accounts.

Whether you are a CPA or CFO in a large corporation, or a family member "blessed" with the accounting chores, insurance agency accounting is somewhat of a "hybrid" approach that often baffles the diehard "cost of goods sold" graduates. The nuances of a "part accrual, part cash" approach can be confusing. Learn everything you can about the system setup, the reports and the workflows that pour daily information into your financial statements.

In the accounting world, there
is an equal credit for every debit, and herein lies the term "balance." To achieve full equilibrium, there should be a detail to substantiate each "balance" in your general ledger. *

The author

Wanda Shumaker, a 20-year veteran of the insurance industry, is technology director for a large Midwest independent agency.

Most common A/R balancing errors
and possible reasons for them

Item manually posted to general ledger but not to the client file. Check with your specific software vendor manual to determine how data should be flowing in and out of your general ledger files. If this is supposed to be "automatic," any manual journal entries to the accounts receivable asset should be suspect.

Timing of posting. Some systems still require a posting process to update all activity in one module to another. While this is not as common as it used to be, knowing how/when your system performs these functions is critical.

Incorrect report parameter selection. This is probably the most prevalent reason why the accounts receivable is out of balance and has nothing to do with the accuracy of data itself. For example, know how your financial statement reflects "pre-bills" or "future billings" and understand how to run the receivables report to match this detail properly.

Timing of report generation. Check with your vendor. Some have stipulations as to when the most accurate month-end detail report should be run.

Most common company payable entry errors

Improper utilization of the reconciliation process in the agency management system. There must be some way to identify and "flag" closed and paid company items before any kind of open item report can be run.

Improper posting of commission checks. This is particularly prevalent with carriers that "mix" their agency and direct bill statements onto one form. Make sure you are not inadvertently posting direct bill commission checks to company payable accounts. (It happens more often than one might imagine.) Making effective use of your reconciliation programs also will help avoid this error.

Paying items for which there is no posted payable. As mentioned in this article, this occurs most commonly with broker and excess-type policies. Adjust your procedures so that a valid payable is created if the carrier must have the money now. Educate your account manager staff on the differences between account-current type carriers and broker or MGA relationships. It will go a long way toward avoiding balancing headaches.

Offsetting direct bill advance checks to company payable accounts. When clients pay cash, necessitating the agency to forward a check on to the carrier, there should be some type of entry that reflects an in/out in cash and receivables. Payables never should come into play in this type of transaction.

Paying "future" payable items. Sometimes this becomes necessary if an item is posted in a future month, but payment is expected in a current month. See if you can tweak your report parameters to show future billed items currently paid--it can be an ancillary report to your regular payable balancing report. (Depending on how your general ledger reports identify future items, this may not be necessary in all systems.)