Financial literacy and fundamental business acumen are two of the most glaringly absent competencies among agency principals.
This article is an adapted excerpt from “Leaving Captivity: Your blueprint for building and scaling a successful insurance agency." The book provides a tactical roadmap for anyone who wants to get better at building, growing and operating a successful insurance agency.
Financial literacy and fundamental business acumen are likely two of the most glaringly absent competencies among average agency principals. This manifestation of ignorance is perhaps one of the most destructive expressions of captivity. For you to begin moving from merely an insurance agency owner to become a business owner, you must first be comfortable with the concepts in this chapter.
In the spring of 2018, a relatively new mentor asked me what I was reading at the time. I replied that other than textbooks for college and a professional designation (the CIC) I hadn't voluntarily read a book in several years. My mentor then said something that changed the course of my life forever: “James, all the truly successful people I know … all of them … are readers. They are habitually and consistently working to improve themselves and gain new knowledge and understanding."
It wasn't meant as an insult or an indictment of my behavior, but it hit me like a major-league fastball to the gut.
Almost overnight, I began taking action to move in the right direction. I asked for recommendations on where to start, and the classic “7 Habits of Highly Effective People" by Stephen Covey was on the shortlist. Habit No. 1 is “Be Proactive,®" and I was convicted of the reactive stance I had been practicing virtually my entire adult life.
This happened concurrently with my increasing dissatisfaction with my career in the exclusive carrier side of the industry. I knew that any move to launch a new business would have to be preceded by a big jump in competency, particularly in the fundamental concepts of entrepreneurship and business ownership.
Despite a decent effort, real progress didn't happen until I hired a fractional chief financial officer (CFO) for RiskWell shortly after our second anniversary in business. After months of intentional effort, I began to be familiar enough with financial terms and concepts to deploy them effectively in our operation.
So, how can you shorten that competence runway? One great tactic is to employ the Known/Unknown Matrix to help map out where you are and where you need to focus. Awareness precedes understanding. To understand something, you must first be aware of it. The Known/Unknown Matrix derived from the famous Donald Rumsfeld speech in 2002 helps break this down into quadrants.
The four quadrants are Known Knowns, which we are aware of and understand; Known Unknowns, which we are aware of and do not understand; Unknown Knowns, which we are not aware of and yet have some understanding of due to preexisting related knowledge; and Unknown Unknowns, which we are not aware of and do not understand.
This last one, the Unknown Unknowns, is the most dangerous one. We can't even begin to attack the challenge posed because we don't know it exists yet. When you are working to begin intentionally improving your competence and comfort in a new subject, it can be quite useful to conduct a Known/Unknown assessment.
Know Thy Numbers!
What's one of the main distinguishing factors between an insurance agent and someone who owns an insurance agency? A business owner knows their numbers.
There are a half dozen or so core metrics that everyone should be familiar with in your business. You don't have to be a best-in-class expert at anything in this chapter to be very successful in this industry. But until you have a working knowledge of these core financial concepts, you will experience avoidable headwinds to your growth.
Here's my list of the core concepts or skills you should be familiar with:
- Know the accounting equation: assets = liabilities + equity
- Read and understand a balance sheet, a cash flow statement and an income statement, also called a profit and loss (P&L) statement.
- Understand the basics of how EBITDA (earnings before interest, taxes, depreciation and amortization) is calculated and what it means for your business.
- Understand how insurance operations in your business translate into business financials, such as direct revenue-generating activity (RGA) versus indirect RGA and non-revenue-generating activity.
- Understand and calculate your customer acquisition cost (CAC).
- Understand and recognize the components of your cost of doing business (CODB).
The Three Kinds of Money
Confession time. To this day, I've never had any formal business training. No classes in management, economics, accounting, finance or marketing. In my six years as an insurance agent working for a big, national carrier, I never once paid attention to any of the above metrics. The company never asked me. My district manager never asked me. I didn't have a coach, mentor or CFO to ask me. The concepts above were irrelevant to my daily life.
The only number I knew by heart at any point of the month was my new written premium. I could look up my commission folio to see how much I had earned month to date, but I never once forecasted or projected revenue. I never had a bookkeeper, reviewed a balance sheet or P&L, or demonstrated any basic competence as a legitimate business owner.
As a sales professional and an insurance agent, I was above average. I was earning a living far beyond what I saw as normal compared to my friends in other roles and other industries. My sights and goals were set so low that I had no idea how far away I was from my potential. The company I represented did me a huge disservice by never talking about revenue or profit and never discussing CAC. They never encouraged me or my agency owner peers to improve our entrepreneurial financial literacy.
There are three kinds of insurance agency money: premium, revenue and profit. Captive and exclusive agents are trained to think and speak in terms of premium. The best independent agents learn to speak in terms of revenue. But you won't ever achieve anything close to your business potential until you learn to think and act with profit as your one and only type of money focus.
We're not going to spend any time talking about premiums in this chapter. The only people who should be caring about premiums in the slightest are insureds and carrier employees. Revenue and profit should be the focus when it comes to your strategic planning, your team member compensation and your operational decision-making. As my good friend David R. Carothers is fond of saying, “Premium is for show. Revenue is for dough."
Achieving sustainable success in this game requires that you are operating as a business owner and not an insurance agent. You are running a business! You are not just running an insurance agency. Insurance agencies care about selling policies, retaining clients, reaching bonus and incentive production qualification and winning awards.
Successful businesses care about two objectives:
- Driving revenue as efficiently, effectively and consistently as possible.
- Operating with principles and behaviors that support long-term profitable growth, maximum stakeholder value and the infrastructure needed to make that happen.
You've probably heard the adage, “it's not about how much you make, it's about how much you keep." The best way to grow your profit margin depends on where you are in the lifecycle of your agency and what kind of marketing and organization chart environment you are in.
If you are an early-stage agency or one in a high-growth mode, then your best bet is to stomp the gas pedal and drive as much new production as possible while remaining true to your brand identity and best practices.
If you are more tenured in the game, and your growth is more linear and predictable, then you may see a meaningful impact on your profitability from cost-saving exercises. Conducting a thorough audit of your systems, workflows and processes (SWPs), your organization chart and your numbers may expose bloat, inefficiency and unnecessary redundancies. Payroll and tech stack are major expense drivers for most agencies regardless of their life stage.
There are always exactly two ways to increase profits in your business:
- Increase top-line revenue while holding expenses flat.
- Capture more of your gross revenue as profit by decreasing expenses.
You will find nuances in the differences between gross profit, operating profit and net profit and digging into other terms found on financial statements. I recommend doing some online research combined with conversations with your certified public accountant, bookkeeper or fractional CFO on these important concepts. That's precisely how I learned this stuff.
James Jenkins is CEO of RiskWell.