Better Cash Flow for Insurance Agencies

Cash flow is an important concept for insurance agency owners. It's important for us to understand what it is, how it works, and what we can do to improve it. I am lucky to be able to spend time around other entrepreneurs. It is both inspiring as well as a reality check. Before the pandemic, I had dinner with a group of talented and ambitious business owners. One of the topics we discussed was how to manage cash flow.

In thinking about my personal story and experience as a serial entrepreneur with several businesses over several decades, I realized that I can't really remember when managing cash flow wasn't just important but absolutely critical to the success of each and every business.

Although those of us who attended that dinner came from all different industries, there were some important lessons on cash flow that agency owners can take away from that conversation. In this article, I am sharing those lessons with you in the hopes that you can gain from my experience. Remember that the only way these lessons on cash flow can really impact you as an agency owner is if you put them into practice.

Cash Flow Lesson #1 - You Will Experience a Cash Crisis 

We would all love to think that agency life will be perfect. You will never run into a problem. You will never experience any type of financial hardship. You will not be the exception to the rule. You will not fulfill "it will never happen to me" when it comes to the cash crisis. At some point, it will happen to you and your agency. Know it. Believe it. Plan for it. The old saying is:

"Pray for the best and plan for the worst."

It does not mean that you are a negative thinker or belong on a show about doomsday survivalists. It just means that you understand that things happen and you will be prepared.

So, get prepared. Having Plan B and Plan C really helps. For me, part of planning is establishing and maintaining a great banking relationship. I have found that setting up lines of credit when you don't need it is quite easy. Keeping your banker informed of your progress is appreciated. Remember that bankers make money only when they lend is useful. Borrowing even when you don't need it helps to build a relationship.

Always ask for a little more than you need, but never over-extend your ability to repay. Having more money than you need isn't necessarily about spending more than you need at that time. You can hang onto those funds for a rainy day.

Cash Flow Lesson #2 - Profit Before Paycheck 

Profit before paycheck does not refer to any of your employees. It refers to paying yourself. Always pay the business first. One of my partners taught me this many years ago. Set a required profit level for your agency. The agency must make at least that much in profits before you pay yourself. The purpose of this is to create working capital for your business so that you have it when you need it.

This is important because if and when your agency is ever valuated, one concept that will be looked at is whether it is cash flow positive. That is, whether the money that comes into your agency is greater than the money that goes out. If the money that goes out is greater than what comes in, your agency is considered cash flow negative. You have a serious cash-flow problem on your hands. It's incredibly important to understand your cash flow as well as your profitability.

Cash Flow Lesson #3 - Make Good Financial Decisions 

Even when things are going very well for your agency, it is important that you make good financial decisions. We've all read and watched news story after news story about businesses that went under because of bad financial practices after doing very well from a market standpoint. We've also read and watched news stories about businesses that have thrived in poor economic conditions, some of which were not considered essential businesses. Often, the main factor that determines whether a business in any industry survives is financial decisions.

Remember that your profit and your cash flow aren't the same things. Your cash flow is the money that flows in and out of your business. It can be positive, meaning that you have more money coming into your agency than leaving, or it can be negative, meaning that you have more money leaving the agency than coming in. Your profit is what is left of the agency's money after all expenses are paid.  

Cash Flow Lesson #4 - Business Decisions Shouldn't Be Made for Tax Reasons

Taxes exist, period. Insurance agencies are for-profit businesses. Eventually, you are going to pay taxes. Of course, it does make sense to consider tax liabilities. It is why we have CPAs and other tax professionals, including tax lawyers. However, you should not make business decisions solely for tax reasons. While you might think you're getting an immediate benefit, if you aren't getting good advice first, you may have some sort of penalty to pay later. You should make decisions based on good business sense, not just for tax reasons.

Cash Flow Lesson #5 - If You Borrow, Consider Assets & Not Cash Flow.

Remember Cash Flow Lesson #1: at some point, you will run into a cash crisis. So, if you're going to borrow, you certainly don't want to put your cash flow at risk. Your collateral is your cash flow. Additionally, if you must borrow, your assets are more likely to give you better terms as collateral than cash.

Cash Flow Lesson #6 - Conserve Your Cash 

There's absolutely no reason for your agency to go on a spending spree during good times. Keep Cash Flow Lesson #1 in mind. At some point, there could be a cash crisis. It's always good to conserve your cash. Cash Flow Lesson #3 says to make good financial decisions. These can be the difference between success and failure in any industry. Conserving cash can also help protect your agency from becoming cash flow negative during lean months.

Cash Flow Lesson #7 - Keep Money Accessible for the Agency 

Money for the agency does no good if it is inaccessible. Always keep agency money in agency bank accounts. Do not keep it in your personal account. Doing so can make it much more difficult to handle accounting matters and may also be a violation of insurance contracting agreements, ethics, and state insurance laws.

Cash Flow Lesson #8 - Collect Receivables on Time 

One of the biggest mistakes that agencies make when it comes to cash flow is in receivables collection. It is imperative that your agency collect receivables on time each month. Don't wait until money becomes tight. If you become your client's lender, you'll end up needing one of your own to get through the month or the year. Unfortunately, your lender's terms won't be as generous or understanding as you are with your client.

Cash Flow Lesson #9 - Get Rid of Unused Inventory 

If you're not using it, get rid of it. When I say get rid of it, I mean sell it for cash and invest that money into something that works for your agency or put that cash in the bank!

Remember, you will have a cash flow problem in your agency sooner or later. When you do, don't give up! Sometimes things can look bleak, but they can and do turn around. As an entrepreneur, managing cash flow is just part of daily life!