How does an agency possibly make a 40% Operating Profit? Answer: By spending only 60%! Ta-Da! In the average agency, if the top 5% = 50% of the income, that means the bottom 95% of accounts are the other 50% of the income. Where are the expenses being generated? Can you say “Profit Center Analysis?” When we look at it, the bottom 50% of customers in the average agency = less than 10% of the revenue and the bottom 25% = less than 5% of the revenue. So again, this is a profitability issue.
How would you like to have a year without any contingency/profit-sharing income? All agency owners are great managers in March and April! That’s because when we look at our P&L, we’re looking at our total profit, not our operating profit. So while it may appear that we are doing phenomenally well, it may not accurately reflect our true profitability.
Do you have a financial model that you manage to? The one we’ve recommended through the years is pretty simple: 25-50-25. It breaks down as follows: 25% Operating Profit. In our method of planning, the Bottom Line becomes the Top Line. Therefore, the first 25% is the first thing you manage to — the profit. 50% Service and Administrative Costs. This is what you pay for service and administrative employees, automation, electric bill, rent, postage and supplies, etc. 25% Sales Expenses. Producer compensation and other selling expenses comprise this portion of our financial planning model.
Do you have a true perpetuation plan in place today? If it’s internal, is it documented and funded? If external, how will you market your agency? I sure hope it’s not to the “biggest bidder”. Do you already have your own Trusted Advisor Team in place “just in case”?
I clearly hope this article has you thinking about your own Risk Management aimed at eliminating vulnerability tied to profitability and perpetuation. The agency you dream of is a matter of choice not chance. Where you are today is based upon decisions you have made (or the tough decisions you weren’t willing to make) and where you go is based upon the decisions you’re willing to make and stick to!!
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