Money, in and of itself, is rarely the true motivation for entrepreneurs. It’s what you can do with money that truly motivates people. For some, money equals financial freedom—the ability to do what you want to do, when you want to do it. Whether it’s supporting your family, your community, your church—whatever, money enables you to do so. To others, money equals time and the resulting freedom to indulge in the things you really love doing.
What you do with your money is your choice. However, you must first earn the money, which means you must create profits.
There are five profit zones that agency owners and managers should actively manage. All too often, I see people looking only at their bottom line. Very few break it down to see what is actually impacting their profits.
Never allow profitable accounts to subsidize unprofitable accounts.
Here the goal is very simple: Every account must create a profit.
As a consulting firm, we started looking at account profitability decades ago, and created a tool called the Account Profitability Analysis (APA). Essentially, it’s a cost accounting method we’ve used to evaluate the profit centers at more than 1,500 agencies over the years. Using the APA, we can determine how profitable each account segment is, in terms of: income, allocable expenses and amount of profit/loss in a particular segment.
For example, if we were manufacturing two different types of widgets, we’d want to know whether we’re making a profit on each of them individually, as well as an overall profit. It’s the same with the insurance industry. As we’ve discussed before, agencies have A, B and C accounts, some of which are more profitable than others. According to our APA:
We have identified six major factors that negatively affect account profitability:
Never allow profitable producers to subsidize unprofitable producers. This does not apply to our new producers, still in training. But once they’re past training, they need to be creating a profit for us. The concern is that we have long-term, “overpaid” producers (due to compensation issues) who are also “under-grown,” in that they’ve already plateaued. Normally agency owners are the ones subsidizing the non-owning producers. If you’re an owner, how would you like to be paid a full commission on your book of business? Unless you can do that, you’re subsidizing others. Following are the major factors affecting producer profitability:
Join our mailing list to receive the latest agency tips, blogs and news from the Sitkins team.
Download the latest white paper from Roger Sitkins.