| | Income - Expenses = ProfitThe equation is straightforward. So is the answer to improved profit and performance. Increase income or reduce expenses--or both. As most agency owners know, it's not quite as simple as it sounds. To make real improvements, its important to understand two key measures of performance--productivity and profitability. 
| Productivity measures staff effectiveness relative to revenue. Revenue per employee, for example, is a widely used measure of productivity for insurance agencies. It is the result of dividing total revenue by total number of full-time equivalent employees. |
Keep in mind that the numbers in and of themselves are not the whole story. You need to understand what's behind the numbers. An agency can report very high productivity results in comparison to their peers when in fact they are critically understaffed and vulnerable to loss of business and exposure to errors and omissions. On the other hand, an agency may report low productivity while making investments for the future that ultimately increase the value of the business.
| Profitability measures the financial return after all business expenses have been met. Pre-tax profit is the most widely reported measure of profitability. However, since there are tax and other ramifications to reporting profit, you need to think of profitability in the broadest terms. For instance, it is possible that a portion of owner compensation is in reality profit. The same goes for other owner benefit expenses. This alone can account for vast differences among agencies in reported pre-tax profit. Therefore, it is helpful to view profitability from several different perspectives. Operating Profit. It's important to evaluate cash flow from operations excluding contingencies and profit sharing. These items often are the difference between a profit and a loss for agencies--and they're beyond the direct control of the agency. Non-cash items such as depreciation and amortization are also eliminated. While there are no industry comparisons for operating profit, this is truly the best measure of an agency’s ability to meet expenses out of operating income. Departmental Profitability. It is important to analyze the contribution each profit center or department makes to the overall agency profitability. Each department should be able to stand on its own. If not, why not? You may decide to stay in an unprofitable line for specific business reasons. Generally, though, you will want to take steps to improve results. Departments can be defined by lines of business such as personal, commercial, life, etc.; areas of focus; or specific niches where the economic drivers may differ. Producers as Profit Centers. Quantifying the effectiveness of the sales staff is another great management tool. Each producer should be generating a return on the investment made by the agency by producing more revenue than it costs to service and support the book of business. Information developed through this analysis becomes the basis for producer compensation planning.
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Once you understand the economic drivers, you can focus your improvement activities to achieve the right results. Unfortunately, you agency management systems is probably not going to give you the detailed management information you need to make the most effective business decisions about improving profit and performance. You can develop your own analysis tools or you can let Transformation Advisors, Inc., help you analyze your results to get the information you need. Our tools can help you look at productivity and profitability from the perspective of the overall agency as well as the individual department or profit center level. We can even model "What If" scenarios to show the results of planned changes. Improving results whether at the agency, department, or producer level usually requires greater premium volume (increased income). This can be accomplished through implementing a persistent, consistent sales system to boost new business production or customer focus initiatives designed to improve retention. Initiatives such as workflow redesign can result in more efficient operations and reduced expenses. Contact us for more information. | | |
