The insurance world is unique among business sectors, in that cash flows and profitability depend on several factors, from premiums set by carriers to policy renewal rates, new business, and overhead. Unlike more traditional retail business models, where owners can look to the markup on their products and services, overhead costs, and total sales transactions to determine profitability, a commission-driven business requires a different kind of accounting.
Understanding how to calculate the the fiscal health of your insurance agency not only can help ensure that your business continues to grow and thrive, but also can help you get the most value for your enterprise if you choose to sell your insurance agency in the future.
Many agency owners use Revenue per Employee to gauge the fiscal health of their business and as a tool for comparison against other agencies of similar size. Although useful, this figure only represents part of the story. Equally important considerations include Compensation per Employee as well as Spread, which can be used to determine potential growth and profitability.
Revenue per Employee – This figure can be calculated by dividing the net revenue after paying brokers for non-owned business placed through the agency by the number of employees. The resulting number can be a good gauge of overall agency performance; however, because premiums, commissions and payment schedules vary regionally and by carrier, Revenue per Employee is not a valid indicator of performance against a peer group.
Compensation per Employee – This figure is determined by combining total salaries, commissions, and benefits and dividing by the number of employees. Comparing Compensation per Employee year-over-year provides helpful insight into changes in the cost of living, availability of skilled labor, savings achieved through automation, and other operational considerations.
Spread – This figure is the difference between Revenue per Employee and Compensation per Employee and represents the funds that can be used to spend on overhead or growth initiatives (e.g., marketing, new equipment, additional staff) or earmarked as profit. The most direct way to improve an agency’s spread and maximize profits is to reduce overhead and possibly reduce compensation (although doing so could impact productivity). Obviously, however, increasing Revenue per Employee (i.e., sales and renewals) can also benefit the Spread.
While looking at Revenue per Employee year-over-year can indicate whether overall productivity is rising or falling, measuring this sum against Compensation per Employee offers a better indication of whether the agency is actually growing or merely maintaining flat profitability in light of increased personnel costs. Likewise, analyzing short- and long-term trends with Spread will show patterns related to profit per employee, giving a more holistic picture of the agency’s overall fiscal health. These indicators not only can help you properly measure the progress of your insurance agency, but also provide critical insights to a potential buyer regarding the true value of your business.
If you are considering selling your insurance agency or need access to capital to fund the growth of your business, call Springtree Group at (972) 395-8811, or contact us online. We look forward to working with you in 2016.
