TOOLS. To build agency revenue, profits and value. Turning Around an Unprofitable Agency

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1 September 2014 TOOLS To build agency revenue, profits and value. page ONE Typical Uprofitable Agency page TWO Income and Expense Statement (con t) page THREE Hypothetical Examples of Actions page FOUR page FIVE Income and Expense Statement (revised) Turning Around an Unprofitable Agency Some agencies consistently generate earnings before tax (EBT) margins of 20% or more and other agencies struggle to generate any profit at all. In fact, some agencies lose money year after year and eventually are forced to sell to other agencies. Those other agencies turn around the sellers operations and make big profits. There is a lesson to be learned here for any unprofitable agency don t wait for a potential buyer to fix your agency; do it yourself now. In this article we will discuss how to turn around an unprofitable agency. The Typical Unprofitable Agency Below is a hypothetical income and expense statement for a typical unprofitable agency. Actual Last 12 Months % Total Revenue REVENUES Commercial Lines 510, % Personal Lines 402, % Group Life & Health 92, Total Commissions $1,005, % Contingent Commissions 22, % Investment Income - 0.0% Gross Revenues $1,027, % Less: Broker Commissions 95, % NET REVENUES $932, %

2 page TWO Actual Last 12 Months % Total Revenue EXPENSES Compensation Owner/Executive Compensation 125, % Staff/Administrative Salaries 382, % Benefits and Taxes 95, % Total Compensation $69, % Selling Expenses Advertising/Promotions 23, % Automobile 30, % T&E and Conventions 15, % Total Selling Expenses $69, % Operating Expenses Rent and Utilities 55, % Telephone 14, % Postage/Messenger 11, % Office Supplies/Printing 20, % Dues/Subscriptions/Donations 26, % Taxes, Licenses & Fees 9, % Insurance Expense 29, % Professional Fees/Consulting 6, % Equipment Rental/Maintenance 14, % Bad Debts 12, % Outside Services 8, % Automation 32, % Education/Training 4, % Miscellaneous Expense 2, % Total Operating Expenses $249, % Administration Depreciation and Amortization - 0.0% Interest Expense 22, % Other - 0.0% Total Administration $22, % TOTAL EXPENSES $945, % EARNING BEFORE TAXES (EBT) ($13,236) -1.4% OWNERS REWARD $112, % Let s assume it is your agency. Although every agency is different, most unprofitable agencies have numerous areas where they are over-spending. The object is to review each line item and seek out opportunities to save. Sometimes it helps to take out the agency s check book and identify all areas that might be investigated. Sometimes it helps to check your agency s expenses versus expenses for same sized agency peers (try the annual IIABA Best Practices Study Updates for industry peer data and the Financial Benchmarking Analysis that Iroquois can do for you for free). Priority should be given to areas that will have the least impact on client retention. Based on the income and expense statement on the previous page, the following are hypothetical examples of some actions that might be taken to turn around the agency:

3 page THREE 1. Broker commission expense is $95,123. Hypothetically for this agency the commission split is 50% for the agency and 50% for the broker, with the agency doing most of the work. A buyer would insist on a better split. Although the split could probably be negotiated downward even more, we will assume the split can be renegotiated to 55% for the agency and 45% for the broker. 2. This agency is spending 64.8% of revenue on salaries and benefits. It is probably overstaffed and has a rich benefits plan for employees. Let s assume they terminate a receptionist and allocate her work among the CSRs who would handle the walk-ins on a rotating basis. Let s also assume they terminate a long term non-performing producer and shift his smaller accounts to the CSRs (as house accounts) and his larger ones to the owner (or to other producers for a lower 20% renewal commission split). 3. Eliminating the 2 previously mentioned terminated employees would save health insurance costs and payroll taxes. The agency might also want to change its employee group medical insurance plan to only pay for the employees (family members would be paid for by the employees). 4. Hypothetically this agency furnishes company cars to 3 producers. By selling the cars (to the employee users for their depreciated values or to outsiders if not wanted by the employees) and by putting the 3 producers on auto allowances of perhaps $600 per month, significant savings can be realized. 5. Eliminating all non-essential travel and attendance at non-essential conventions can save some more. 6. Eliminating a cell phone for the terminated producer and eliminating a non-business cell phone currently charged to the agency generates additional savings. 7. Collecting addresses from all clients, asking who prefer correspondence, and making it a standard procedure to use whenever possible, can save on postage. Using next day delivery for rushes (instead of overnight mail) saves some more. 8. By collecting all office supplies from desks of employees and centralizing them plus changing the approver for supplies to a cost conscious person, more can be saved. 9. Reducing donations and eliminating non-essential ones as well as eliminating subscriptions for newspapers and periodicals generate savings. 10. Auto insurance expense can be eliminated since company cars were eliminated. 11. Hypothetically, a non-essential outside marketing consultant was eliminated. 12. Making producers responsible for bad debt caused by their requesting exceptions to the agency s credit and collections policy increases accountability and saves money. 13. Eliminating use of temps and holding employees accountable throughout the year for keeping their work current, yields savings. 14. Finding a less expensive technology support service & eliminating software licenses for 2 terminated employees can reduce costs. 15. Eliminating continuing education cost for terminated producer reduces this cost. On the next page is a revised income and expense statement showing the results that might be achieved by taking these actions.

4 page FOUR Actual % Total Adjust- Going % Total Adj. Actions Taken Last Revenue ments Forward Revenue Notes 12 Mos. Next 12 Mos. REVENUES Commercial Lines 10, % $ - $10, % Personal Lines 402, % $ - 402, % Group Life & Health 92, % $ - 92, % Total Commissions 1, % $ - 1,005, % Contingent Commissions 22, % 22, % Investment Income 0.0% 0.0% Gross Revenues 1, % 1,027, % Less: Broker Commissions 95, % (9,512) 85, % 1 Renegotiate 1099 outside broker agreements from 50/50 to 55/45 NET REVENUES $932, % 9, , % EXPENSES Compensation Owner/Exec. Comp 125, % 125, % Staff/Admin. Salaries 382, % (98,985) 283, % 2 Net savings from eliminating receptionist & non-performing producer Benefits and Taxes 96, % (25,424) 71, % 3 Payroll tax savings on terminated EEs; change group plan to EE only cov Total Compensation 604, % (124,410) 479, % Selling Expenses Advertising/Promotion 23, % 23, % Automobile 30, % (9,387) 21, % 4 Sell co. cars to users & change to $600/mo. auto allowances for 3 producers T&E and Conventions 15, % (7,023) 8, % 5 Eliminate non-essential travel and attendance at conventions Total Selling Expenses 69, % (16,410) 53, % Operating Expenses Rent and Utilities 55, % 55, % Telephone 14, % (1,920) 12, % 6 Eliminate cell phone (terminated producer); eliminate 1 discretionary cell phone; Postage/Messenger 11, % (1,500) 9, % 7 Change overnight mail to next day; collect & use client s where permitted Office Supplies/Printing 28, % (8,500) 12, % 8 Collect/centralize supplies, change approver, cut budget, eliminate unnecessary printing Dues/Subscript/Donations 26, % (8500) 18, % 9 Eliminate discretionary donations; reduce other donations and eliminate subscriptions Taxes, Licenses & Fees 9, % 9,

5 page FIVE Actual % Total Adjust- Going % Total Adj. Actions Taken Last Revenue ments Forward Revenue Notes 12 Mos. Next 12 Mos. EXPENSES con t Insurance Expense 29, % (3,600) 26, % 10 Eliminate auto insurance expense for 3 sold company cars Prof. Fees/Consulting 6, % (2,500) 4, % 11 Eliminate outside marketing consultant Equip. Rental/Maintenance 14, % 14, % Bad Debts 12, % (7,500) 5, % 12 Make producers resp. for 50% of back debt caused by their exceptions to policy Outside Services 8, % (4,377) 4, % 13 Significantly reduce use of temps Automation 32, % (12,000) 20, % 14 Change tech support service person; eliminate software license for 2 terminated EEs Eduction/Training 4, % (575) 3, % 15 Eliminate continuing education cost for terminated producer Miscellaneous 2, % 2, % Total Operating Expenses 249, % (50,972) 198, % Administration Depreciation and Amortization - 0.0% 0-0.0% Interest Expense 22, % 22, % Other - 0.0% - 0.0% Total Administration 22, % 22, % TOTAL EXPENSES 945, % (191,792) 754, % EARNING BEFORE TAXES (EBT) (13,236) -1.4% 201, , % OWNERS REWARD 112, % 313, % As you can see, if all of these actions were taken, the going forward earnings before taxes could increase to 20% of revenue or approximately $188,068 and owner s reward (earnings before taxes plus owner s compensation) could increase to $313,500. With that much money on the table for someone who is willing to make some hard decisions, it is difficult to understand why any owner would hesitate to take action to fix underlying problems and begin enjoying the pleasure of owning a profitable agency. The IROQUOIS Group

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