2020 Best Practices Study

like the COVID-19 pandemic. By rethinking your financial foundations, you can play both offense and defense while you wait for the yellow flag to raise. You can defensively address issues brewing on your balance sheet, while at the same time go on the offense to ensure a rapid response to changing economic circumstances. Admittedly, agency finances can be complicated, but below are three important areas to rethink.

1) Protect your balance sheet. Your balance sheet is your agency’s war chest and safety net. Protect it at all costs. The following are a few especially relevent balance sheet items to rethink:

• Keep an eye on accounts receivables. While there has been an industry push to move from agency bill to direct bill, a significant amount of agency bill still exists. Poor management of accounts receivable can be deadly. If an agency fails to collect a $10,000 premium account, it would have to write almost $70,000 in additional premium to make up for that loss. Losing sight of accounts receivable can have dire consequences.

• Consider debt more carefully. Traditionally, banks hesitated to loan money to insurance agencies given the lack of hard assets and collateral. In recent years, that has changed, as banks gained a better understanding of the opportunities within the insurance industry. In fact, most agencies can now obtain up to three times their annual EBITDA in debt funding. Ready access to debt can provide necessary capital to fuel growth investment and provide reserves in uncertain times.

Debt and Leverage

1.4x

100%

1.5x

1.5x

72.2%

1.0x

1.0x

75%

60.5%

1.0x

0.7x

50.0%

41.5% 38.6%

40.7%

50%

1.0x

0.5x

25%

0%

0.0x

< $1.25M $1.25M- $2.5M

$2.5M- $5.0M

$5.0M- $10.0M

$10.0M- $25.0M

> $25.0M

% of Firms with Debt

Average Leverage

• Rethink your cash position. Cash is king and insurance agencies generate a lot of cash. Unfortunately, many agency owners view the healthy distributions they take as compensation, rather than as discretionary distributions of profit that might better be retained in these uncertain times. Many agencies routinely distribute 80-90% of pretax profits. Retained profits are an excellent source of capital to fund growth investments and perpetuation and to provide rainy-day funds to weather the COVID-19 storm.

2) Develop multiple financial forecasts. Best Practices agencies typically rely heavily on budgets to help manage towards desired growth and profitability outcomes. In normal times, this is enough. These are not normal times.

To protect your agency in a COVID-19 world, develop multiple forecasts and corresponding action plans – best case, worst case, and expected. Each forecast should be built with as much available information to inform revenue, including ground-level feedback and projections from producer-client interactions, knowledge of industry concentrations and potential impacts, and updates from peers, government officials, medical personnel, clients, and insurance company partners.

Once created, these dynamic forecasts and related action plans will allow you to adapt and pivot in real-time without making decisions under fire when the pre-pandemic budget goes out the window. Decisions that might normally take

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