There’s a mathematics pun going around – “There’s a fine line between a numerator and denominator – and only a small fraction of people will get it!”

Most puns are simple plays on words without further meaning. But this one came to me just as I was trying to figure out how to impress upon insurance agents why Strategic and Tactical Planning and Budgeting are critical if you want to grow your agency’s value and move beyond simply making a living to building a profitable business.

Well there is a fine line between working hard and ‘doing the best you can’ and setting achievable objectives and targeting revenue and expenses to expected levels of profit and adding Accountability to all that hard work that each of us commits to our businesses.

Working hard and doing what you can to build your business is the numerator of our math problem. Spending a few days each year in Strategic (long term) and, Tactical (annual) Planning and Budgeting each year is the denominator that allows for that hard work; and effort to pay off in the other side of the equation, agency growth and profit. Planning and Budgeting defines your ‘dreams and wishes’ for a good year into substance and action plans that allow your goals to be achieved.

Commitment and Accountability

That’s what planning and budgeting does – it adds Commitment and Accountability to an otherwise uncontrolled work environment. It does that for the agency owners and it also does that for all the employees, producers and administrators, who are expected to contribute to the agency’s success.

And the ‘fine line’ between our numerator and denominator is often the difference between budgeting contingency income, always an unknown contribution to revenue, above the line (as gross income) or below the line (as excess profit). The best agencies have learned to live on their commission income and fees, and will expense their agencies to a zero base; or to a profit level before contingency income are infused into the agency.

So you now have three things to target for this Fall:

1. Conduct a Strategic and Tactical Plan

Following the rule of one of our mentors, Stephen Covey, Begin With The End In Mind!

Define a long term expectation of your business through the design of a Mission and Vision that will tell you and anyone else what you expect the agency to become in the course of five years.

Create Strategies to define what you must do differently in the long term to achieve your vision and mission for your business.

The lowest level of each Strategy becomes the objectives of the agency for the next year. Do not accept an Objective that does not dovetail to one of your Strategies –it means that you are straying from your core values and will not achieve your long term goals.

Include your managers and staff in the Tactical Plan and have them create the Action Plans that define what you must do and how to achieve your objectives for the year. Help them define Monthly Benchmarks that will compare their actual results with the monthly milestones that should be reached if your Objectives are being met.

2. Add a level of commitment and accountability to the Plan by budgeting your agency in concert with the expectations of the Plan

Budgeting is like following a diet. Those of us who fail in each diet, considers them restrictive and keeping us from having what we want. The successful dieters don’t consider their diet restrictive. They consider the diet a plan to be followed to achieve their goal. Similarly, the budget is a guideline for your expected operation of your business and a measurement device that tells you early in the year whether or not you will achieve your financial goals. Create a zero-based budget each year – it is the most effective way to determine if your revenue goals (growth through new business and retention of existing accounts) are sufficient to pay your expenses and generate a profit to your business. That profit should not be considered a ‘piggy bank’ from which you draw to pay for all your discretionary spending. It should be a resource to fund your Strategic Goals and Objectives (i.e. acquisitions without full leverage using bank loans, hiring additional production and service staff, upgrading systems, paying for target and focused marketing, etc).

3. Either budget your agency to break-even or profit without contingency, or move a percentage of contingency below the line each of the next several years until you are weaned off depending on a fluctuating and ‘iffy’ revenue source to operate your agency.

It is unfortunate but 75% of all agents in the U.S. require their contingency income to operate. Without a good contingency year, they become financially strapped and must often hit their Lines of Credit to pay their normal bills. Two or more years without expected contingency income require drastic measures to adjust expenses.

If you are among the lucky 25%, you should bring your contingency income below the profit line and get used to operating each year within your Operating Income (commissions and fees). The contingency income generated in one year becomes your seed money for growth and improvement in the next year. This way a bad year simply puts off planned growth initiatives instead of requiring lay-offs or borrowing money.

If you are in the unfortunate majority, I urge you to take a percentage of your contingency and move it below the line, growing that percentage each year until you achieve the goal of operating within your means.

If you would like assistance in your Planning process, please call us at 800-779-2430.