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Agency Financial Management

Financial wisdom in an uncertain economy

How to keep cash flow healthy and grow intelligently

By Rick Dennen

In any economic season, cash is king. In times when the economy is unpredictable, as in recent years, cash is critical. Decisions regarding expansion, marketing, hiring, payroll and key strategies are all contingent on the availability of cash.

Amid the ongoing economic uncertainty, many independent agency owners have adopted a "wait and see" attitude when it comes to their financials. They've delayed major changes, waiting to see if the market would harden, how close our government would get to the edge of the financial cliff, when consumer spending would grow stronger, and to what extent credit standards would loosen. As a result, they've deferred strategic moves to manage their business more effectively. The approach has been to simply collect commissions, pay expenses and manage the daily grind.

The uncertainty continues in the first quarter of 2013 as a result of debate over the debt ceiling, budget cuts and other lingering issues. This makes clear that to some extent the economy will always be unpredictable. Agency owners should accept this fact, gain a strong understanding of their cash flow and take proactive steps to manage their money effectively through both good times and bad.

Although profitability is the lifeblood of every business, cash affects the ability to operate; to access credit for growth investments, debt consolidation or reduction; and to position a business for sale when the time is right. Now is always the right time to develop a plan to ensure a healthy cash flow. A plan allows agency owners to track expenses and identify potential issues in time to prevent shortages and ensure adequate cash flow. In addition, planning will help the agency owner ascertain the need for a loan, line of credit or other sources of working capital to support growth.

The need for planning may be evident, but it's surprising how many business owners neglect this practice. I often hear sad but true accounts of businesses that are struggling to keep their doors open because, although they've grown, they've failed to develop a basic plan and now don't have enough cash to operate.

Avoiding this kind of situation isn't that difficult. Start by implementing best practices:

Know the healthy ranges for financial ratios and strive to achieve them. Credit is very helpful in the right situations and often is necessary, but some businesses have taken on too much debt and have little cash. Be cautious about large real estate transactions, overvalued acquisitions and using credit cards to cover operating expenses. By adopting conservative fiscal policies and making decisions that align with proven business finance guidelines, you can build a strong financial foundation.

Keep personal spending in line. Spending to support an owner's lifestyle can take its toll on a business. Exotic vacations, luxury vehicles, jumbo mortgages and other pricey perks have been the downfall of many businesses, including agencies and brokerages. Operating funds are drained to increase a principal's salary, sometimes requiring the agency to incur debt to fill financial gaps. Even when the agency is enjoying success and growth, owners should resist overpaying themselves and risk depleting agency cash flow.

Stay current on tax payments. Some business owners are slow to pay themselves, but that doesn't work when it comes to Uncle Sam. The failure to set aside taxes each month comes back to bite many businesses on April 15. Cash flow suffers when owners are faced with a huge tax bill. Sometimes their budget can't withstand the expense and they end up with tax liens. Even in difficult times, resist the temptation to divert tax money to other areas.

Resist investment traps. Decisions to grow by investing in additional producers, new technology, consulting and other strategies must be weighed from the perspectives of time and money. Have such investments produced tangible results in the past? Do you have reliable metrics to help you make these decisions? Too often agency owners invest in promising producers, high-profile consultants or sophisticated automation systems, only to see thousands of dollars wasted when things don't turn out as expected. Sometimes the problem isn't the investment itself, but the absence of an adequate plan or poor execution of a plan. Although it's essential to invest in growth, it's critical to use reliable metrics and to be realistic about expected results so you don't get locked into large, long-term payments that hurt cash flow.

Finally, every agency must create a comprehensive and realistic annual budget to guide operations and decisions. Especially in times of economic uncertainty, many businesses function like many people—paycheck to paycheck—without a plan or regular evaluation of financial health.

Agency owners can make a big difference by comparing budget numbers to actual numbers each month to identify important trends. If, for example, income is rising faster than expected or commissions are taking longer to arrive, the budget can be adjusted for the next few months to ensure adequate cash flow. If costs are trending higher than planned, receipts can be reviewed to ascertain where money is going. With a detailed plan and regular monitoring, your agency can maintain a healthy cash flow. A plethora of resources are available to help, including software and accountants, and you don't have to spend a fortune to access them.

The author

Rick Dennen is president and CEO of Oak Street Funding, which provides commission-based lending for insurance agents who need capital to buy, build or sell their agency. Dennen is a licensed agent in the State of Indiana for life, accident & health products and a licensed certified public accountant in the State of Indiana. In addition, he is an instructor in venture capital and entrepreneurial finance at the Indiana University Kelly School of Business. He can be reached at

N. B.: The materials in this article are for informational purposes only. They are not offered as and do not constitute an offer for a loan, professional or legal advice or legal opinion and should not be used as a substitute for obtaining professional or legal advice. The use of this article, including sending an e-mail, voice mail or any other communication to Oak Street, does not create a relationship of any kind between you and Oak Street.


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