The Principal Files

Rechecking Your Expenses Can Lead to Cash
By Andy Thompson

As 2007 started to wind down, our agency began the budget process for the coming year. We were anticipating less contingent income than we had received in past years. We were planning to move our operation into a much larger building, and we were planning to add another producer. My financial team and I knew it was time to tighten up.

In my 12 years in the insurance business, I’ve come to know a number of other agency owners. So I decided to call the CEO of a similar size firm located a few hours away from me. When I reached him, I said, “Dan, we’re getting ready to review our financials and I was wondering if we could do a financial statement exchange.” Dan replied, “What?” I said, “It’s not a big deal. You send me your income statement and I’ll send you mine. And we’ll help each other analyze expense percentages.” After some thought, he agreed. And we began our review.

This request for his income statement was merely a part of a much larger process we use to financially manage our office. Since I started buying our agency from my father in 1996, I have always been a lover of the statement. I have my internal accountant produce a number of key reports each month that help us understand exactly where we stand and that guide adjustments throughout the year. Among these is a four-page income statement, broken down by division, with a compilation report for the entire agency. This shows income, expenses and the percentage of each.

I also get a snapshot of year-to-date data compared to last year’s year-to-date. In addition, we compare our information against best practices financial data provided by the Independent Insurance Agents & Brokers of America. I also receive a breakdown of our key ratios, company production reports, yadda, yadda, yadda.

Let’s be clear, I’m a big believer in the more data one can review about their company, the better they are at making good decisions.

The goal of our “Dan Statement Review Meeting” was to analyze his expense percentages and compare them to ours. After our first review, it became apparent that we had some big “deviations” in expenses when compared to Dan’s, so I called to see if his company was using creative accounting functions. As I suspected, he stated his agency was “pretty much by the book.”

The areas we uncovered that led us to a deeper review included cell phone expenses, phone expenses, software and postage. We broke down each of these line items and reviewed them more closely. We found that our cell phone contract was in desperate need of negotiation. When checking our software costs, we uncovered a monthly support fee we were paying for software we had never used. And our phone expense and postage costs led us to ask, “Why are we doing that?”

Since that meeting, we have made minor changes to several line items, but those minor changes have made greater-than-minor impact on our bottom line. That additional revenue has helped with the move to our new office and subsidizing our new producer.

As agency owners, we all get caught moving too fast and not looking at the minute details of our agency’s expenses. By taking some time and doing a little comparison, you too may be able to uncover some expenses, eliminate them and add to your bottom line.

AQ

TAM-user Andy Thompson owns an independent agency in Parker City, Indiana. He can be reached at andy@thethompsongroup.net.