MAXIMIZING AUTOMATION
A look at the pros and cons of direct bill reconciliation
By Wanda Shumaker
The pressures of high volume and limited staff often lead agencies to opt out of detailed direct bill reconciliation.
One of the most prevalent accounting-related discussion and training topics is direct bill reconciliation. While most agency automation systems have several ways to approach the task, there is still a wide range of opinions as to whether this process is really necessary.
First, the basics. What does direct bill reconciliation really mean? In the purest sense, it means that the agency has some method for recording a transaction at the point of policy or endorsement issuance. When commission statements arrive from the carriers, each item is compared and "checked off" as paid by the carrier in the agency automation system.
The primary reason for doing this activity is to make sure the agency is receiving the money from the carrier. It also helps identify and correct "internal" transaction errors. The process should also provide a means to identify open or unpaid items from the carrier, much the same way an agency bill receivables report would identify what clients owe the agency in uncollected premium billed.
Sounds reasonable and simple, doesn't it? Yet as an industry, we're not quite ready to embrace the practice universally. Objections range from, "It takes too much time," to "You don't catch enough mistakes to make it worth your time," to "That's why we use direct bill, so we wouldn't have to track payments."
Not seeing the forest for the trees
"It takes too much time" is the most common objection that agencies have to direct bill reconciliation. If the agency has never formally reconciled its direct bill statements, or the previous management system did not have the capability, it is easy to look at the process superficially and decide that it's more daunting than it actually is. Yet, if you look at all the other issues surrounding the reconciliation process, it's surprising how much time is lost dealing with matters that wouldn't arise if the agency reconciled its direct bill statements.
One agency I know of does a significant amount of direct bill business, yet the decision makers believe it's a waste of time to reconcile the direct bill statement.
However, the agency also did not want to pay its producers direct bill commission until the carrier paid the agency. The process for preparing the producer statement for payment went something like this:
1. Photocopy the commission statement, one for each producer.
2. Go through each commission statement copy and highlight the items for that producer.
3. Key the items into a spreadsheet for each producer (name, policy number premium and commission).
4. Process addition formulas and make general ledger entries.
This process had to be repeated five times--taking into consideration that the agency represented five companies.
How long did it take to process the two producers on staff, both of whom wrote a great deal of direct bill business? About five to seven business days every month. Imagine the time it would take if the agency added more producers!
In this particular scenario, the reconciliation process, while it would require someone to review all items on the statement and flag them in the computer, would also handle each producer automatically and generate a month end report that also posts the general ledger payable and producer expense. The reconciliation process itself for the same five companies represents about five to seven hours of processing time per month. However, it would eliminate the additional time necessary for the producer statement tally.
Some agencies opt out of the full reconciliation process because "you don't really catch enough mistakes to make it worth your time," or "we put these policies on direct bill so we wouldn't have to track collections." Statements like these imply that someone other than the agency is responsible for seeing the agency gets paid for the business it places. Certainly the client has an obligation to pay and the carrier has an obligation to remit commission to the agency, but who other than the agency should be responsible for seeing that the two actually do match up? I cannot think of any other business scenario where an owner would say, "Well, it's just too much trouble to track whether I've been paid or not."
Suppose you took the same approach with agency bill clients, and said, "We don't bother posting checks to individual client ledgers, then running statements and aged receivables because most of our clients pay most of the time." It would not take long for such indifference to create severe cash flow issues.
What are the choices?
Agency automation systems typically offer several reconciliation options. There are variations in the specific processes, but they usually fall into one of the following:
Full reconciliation option. Production entries are made as regular transaction entries, just as an agency bill entry would be made. Typically no client invoice prints, but a record is created with an open balance to be flagged and closed during a detailed reconciliation process once the check and statement arrive from the carrier.
No reconciliation, but production entries still made. Using this approach, the service managers enter production transactions for the policy renewals, endorsements and cancellations, but there is no effort to "match up" the monies received with the commission statement.
Record commission statement detail only. With this method, typically no invoice is processed up front. Policy records and expiration dates are updated, but there is no production entry created. When commission statements and checks arrive from the carriers, individual commissions received are entered into the system. However, there is no "match up" to expected amounts. Production entries are recorded "as received" from the statements.
Whether an agency reconciles direct bill is often driven by other internal matters. Here are some of the more common issues that influence this decision:
* The method by which producers are compensated. If the agency doesn't wish to pay producers until the agency is paid commission by the carrier, it will affect which reconciliation process will produce the most efficient results and needed reports.
* Staff size and resources available. The record only commission option is growing in popularity. In fact, some carriers offer the option to download direct bill commissions. This is still not pure reconciliation, but it is perceived as a time saver compared to entering individual entries from a commission statement. Yet it still does not provide a true check and balance system to verify that commission is received for what was placed.
* How the agency recognizes income. In a pure accrual environment (where the agency accrues direct bill and agency bill income based on transaction/effective dates), the matter of reconciling direct bill may be necessary to provide the proper supporting financial reports. For example, to balance the direct bill receivable due, there must be a way to identify what exactly is due at a given time.
* Volume of direct bill transactions. High volume agencies often view the time to invoice and time to reconcile as not worth the effort, yet these agencies may be overlooking a potentially useful activity as we discussed earlier. Some agencies that utilize full reconciliation have also reassessed the use of staff in the agency, putting this task at a clerical level, rather than using CFO or high-level accounting staff skills.
* Service staff familiarity with invoicing procedures. One of the big challenges presented by full reconciliation is service staff training, particularly in invoicing. Some agencies have actually abandoned reconciling because "the staff doesn't know how to invoice it properly." Rather than investigate and correct the workflow process, an agency gives up and opts for what it believes to be a less intense process. One agency I know of opted for the record only method, only to find that the policy records needed to support this process weren't accurate, making it every bit as labor intensive to record as it was to reconcile in full.
* The importance of data that supports financial statement information. Consider that full reconciliation provides, in many systems, a way to record up-front production as well as paid production. If you record direct bill income on a cash basis, as most agencies do, the paid production that results from the reconciliation process can also be a good supporting schedule detail report to complement
the financial statement totals.
So what's the best solution?
The pressures of high volume and limited staff often force agencies to opt out of detailed direct bill reconciliation. Even if you finally decide that you're comfortable with the choice not to reconcile, you owe it to yourself to become familiar with the options available in your automation system.
If you believe you should be reconciling, but don't believe you have the time or resources; it may also be time to revisit your internal resources. Perhaps there are tasks that can be allocated to lower-salaried positions or even interns or part time staff. Learn everything you can about the options available through your technology system and how the decisions affect your ability to draw other data and supporting information.
If the reconciliation process has been abandoned because the up-front workflow (invoicing) does not support it, consider addressing that training issue. Service staff members may not understand the benefits of the process, and thus may not be properly trained to get the data entered accurately. The old adage, "Don't throw the baby out with the bathwater" comes to mind where one disregards the important thing.
Finally, the current volatility of the marketplace might give agencies new cause to reconsider this issue. With shifting carrier ratings and liquidity concerns, it magnifies a tenet that has always been and always will be true: Your money is your responsibility. *
The author
Wanda Shumaker's company, WJS Consulting Group, provides practical insights into the effective use of agency technology. She has assisted more than 500 agencies while a trainer for a major software vendor, and has served as the automation manager for a large agency. Contact Wanda via e-mail at wanda@wjscg.com or visit her Web site: www.wjscg.com.