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November 10, 2002 at 07:00 PM
What Part Of Your Practice Is Most Profitable?
Youre working harder. Youre working smarter. But your net earnings are stagnating. Why cant you increase the bottom line? This is a question every agency faces; yet few are able to answer from a profit perspective. Much has been written about refocusing your business, but how do you decide where to make that change?
In our overactive, current results-oriented world, we tend to focus our energy on near-term rewards. This is typically measured by cash flow or by the commission on the last case placed. Only when we reach a cash shortage do we look at our expenses and how they relate to our activities.
Yet, if we want to grow the value of our business, we need to understand how these items affect the long-term value. How do we create a process to help us analyze and improve our business?
The best approach is to look at your business like an investment opportunity for a third party and apply standard investment techniques, just as you would for a client. This requires you to know the relative profitability of your activities and to relate your expenses to the revenues they generate, as well as understand the impact on the total value of your organization.
Ultimately, you will want to channel your activities to the high-profit segments just as a well-run business channels its capital investments to high-profit opportunities.
The process can be described by Figure 1, The Value Circle, which represents the continuous linking of four activities: gathering data from carriers, analyzing your cost/activity structure, performing projections, and reviewing/monitoring results.
The Value Circle process involves understanding the continuously changing nature of your business and how it impacts your financial results.
As shown, the “Value Circle” relates goals, activity and product/carrier choices to your current profit picture and creates a path to increasing that value over time. Regardless of the size of your agency, creating, communicating, and managing your goals are critical to success.
1. Gathering Data From Carriers. To start, you need to project future income, including your future commissions and bonuses as far out in the future as they go. Here is where many projections take a short cut and make a rough estimate using their commission statements and a spreadsheet. That is not very reliable, and it will be obvious whenever you negotiate with a buyer, a bank, or a home office. To maximize the opportunity, the most reliable method is to base your projections on in-force data from your carrier.
The number one problem for most agencies is getting usable, understandable data from carriers and then knowing how to use it. Companies provide producers with data developed for ease of use by the company, typically for actuaries and accountants. Agent needs are generally secondary; a commission check and some supporting information are deemed enough.
Many carriers cant routinely provide a projection of future commissions for an agency, but this information is critical to your evaluation. You require detailed data from each of your carriers that will allow you to create projections that are as important to your business as the companys projections are to them. This must be done routinely and consistently. If a carrier wont, or cant, you should be persistent. Maybe you havent asked the right person.
