GROWTH STRATEGY REVIEW
Making the most of difficult market conditions by using MGAs and effectively managing cash flow
By G. Edward Kalbaugh
In a hard market, retail agencies should seriously consider gaining access to the markets provided by general agencies, both for personal and commercial lines.
As agency owners well know, nothing fits the "good news bad news" scenario better than hard market conditions--rates are high, but there are few markets in which to place business. To make matters worse, agency costs are increased by the additional workload of conditional renewals and new business underwriting imposed by insurance companies.
During this hard market, some agencies have been forced to sell, merge or reduce operations considerably. Other agencies are making the most of these difficult market conditions by increasing sales opportunities and effectively managing cash flow.
Increase sales opportunities
There are hundreds of managing general agencies in the United States, ranging in size from a few million dollars in premium to around a $1 billion in premium, and representing from a handful of companies to several hundred companies each. Many of these general agencies are capable of writing business in all states, and most general agencies can write business in at least half the states. These general agencies compete heavily for the business of retail agencies, even to the point of assisting in lead generation, helping close the business, and educating and training retail agents regarding commercial risk assessment and management.
However, retail agencies usually prefer to stay within the bounds of the business appetites of the companies they represent instead of reaching outside their comfort zone to access business via markets provided by general agencies. There are several reasons for this, not the least of which is that general agencies pay less commission than direct markets. In addition, general agencies add another layer between the agency and the insurance company that sometimes negatively impacts the retail agency's customer service.
Nevertheless, in a hard market, retail agencies should seriously consider gaining access to the markets provided by general agencies, both for personal and commercial lines. The main reason, of course, is that accessing general agency markets enables the retail agent to keep or get business that would otherwise be lost.
When entering into arrangements with general agents, retail agents should structure the relationship to achieve longer-term goals, not just immediate market access. Here's what Allegent Growth Strategies recommends for our clients.
Establish agency business goals related to use of general agency markets. Assess the general agency landscape to identify those general agencies that could write the agency's business. Interview the general agencies to determine those that fit best and negotiate agreements based on long-term goals. The agreements should include guidelines for submissions from the retail agency, level of service expectations for the general agency, and provisions for increased commission if certain volume and profit levels are reached.
Once the agreement is in place and business flow is established, retail agency owners should take personal responsibility for agency staff relationships with general agency underwriters and customer service agents.
Preserve cash flow
The second important area is to ensure that the agency remains profitable by preserving cash flow. We will assume in this discussion that the agency has or will take reasonable steps to reduce expenses.
Cash flow is simply how much money moves into and out of your agency. Losing control of cash flow can easily put your agency in financial jeopardy, especially in a hard market when renewals and new business are tenuous. Accordingly, sensible cash management can provide the cushion necessary to make it through hard cycles. Here are some techniques for improving cash flow and profits in your agency:
1. Never allow your money to be idle.
Use a money market account at your bank and make sure it is linked to your checking account for telephone or online transfers. Deposit daily receipts into the money market account, where they will immediately start drawing interest. Never leave checks lying around in a desk drawer until you can get to the bank. Using every cent of your money to make money is the mark of a professional businessperson.
Never deposit receipts directly into your checking account. Keep a minimum balance in the checking account and transfer cash by phone or online as needed to cover checks written. This allows you to draw interest with almost all of the money moving in and out of your business.
This guideline is important even when money market accounts are paying low interest rates. When the rates start to move up again, so will the interest income appearing on your bottom line.
2. Use other people's money.
Building large, successful businesses without borrowing money is the exception, not the rule. Especially during periods of low interest rates, careful use of credit can be one of your most effective business-building tools.
While most people should avoid extensive use of credit for personal affairs, borrowing for business makes sense. That's because the costs of borrowing are legitimate tax deductions for businesses. Also, it makes more sense to spread out the cost of capital purchases than to put stress on your cash flow by laying out large amounts of cash that could be put to productive business use.
3. Lease instead of purchase.
While leasing products like cars or appliances for personal use is usually the most expensive way to maintain such items, leasing makes sense in business, especially if you will be able to use the cash in your business or in your investments to earn a better return than the cost of leasing. However, since each case must be individually evaluated, we recommend discussing large capital expenditure requirements with your financial advisor.
4. Delay bill payment.
There's a reason why checks are slow to come in from your accounts receivable. Keeping your cash as long as possible means that money is available to draw interest or to work in your business. Establish a system for paying bills only when they are due, but make sure you don't jeopardize your credit standing by paying bills late.
5. Aggressively collect accounts receivable.
If clients learn that you are casual about money owed to you, you can be certain they will stretch your cash flow to the limit. Be aggressive about collecting receivables within 30 days. Never fund client premium payments, and never allow producers to fund client premium payments.
6. Maintain a cash cushion.
Always keep enough cash in interest-bearing accounts to cover normal operating expenses for three to six months. Achieve this objective even if you have to sacrifice your life style temporarily.
7. Seek the counsel of a financial advisor.
Managing money is a financial advisor's function. Even if your agency is small, it's a good idea to have a strong relationship with a financial advisor and with the bank where you do business. Discuss your financial circumstances honestly with your financial advisor. You'll receive sound advice and have an advocate should you ever need a little financial help.
8. Use your computer to help manage your cash flow.
Whether you are a large agency using one of the agency management systems or a small agency using Quicken or Money on a desktop PC, use the computer to handle as much of the financial matters as possible, including your investments. All of the inexpensive software packages designed for small business and personal finance are infinitely easier to use than they were as recently as a couple of years ago. And they can illustrate in dramatic fashion how much you can benefit from a sensible cash management system.
Summary
The difference between financial success or failure can sometimes depend simply on managing the top line and the bottom line to ensure positive cash flow through difficult periods. To help with the top line, agency owners should seek out general agencies that can provide assistance with markets and other sales related functions. To help with the bottom line, owners should follow the basic principles of cash management. *
The author
G. Edward Kalbaugh is a partner with Allegent Growth Strategies, a full-service consulting firm specializing in services to the insurance industry. Allegent is located at 100 Crossways Park Drive West - Suite 104,
Woodbury, NY 11797. He can be contacted at (516) 364-7034, or at info@allegentgsi.com. The company's Web site is www.allegentgsi.com.