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Getting Your Agency Finances in Order: Accounting Tips for Independent Insurance Agencies

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Accounting tracks the most important aspect of your agency: your cash

flow. Knowing your income and expenditures means knowing the core of

your agency. If you don’t have a handle on your accounting processes, it’s

time to get a grip.

This eGuide hits the high points of your accounting systems and provides

ways to make your accounting process run more efficiently, and in turn

help your agency run better. Whether you’re just starting out or are in need

of a system re-vamp, this eGuide is designed to help you determine what

your agency needs to keep up with finances.

Getting Your Agency Finances in Order: Accounting Tips for Independent Insurance Agencies

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Tracking Your Cash Flow ........................................................................ 4

Making a Change ................................................................................... 6

Integrating Accounting ......................................................................... 11

Calculating Commission ....................................................................... 14

CONTENTS

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Tracking Your Cash Flow

In the accounting world, there are two primary ways to handle

your agency’s finances. The first is cash accounting, which

tracks income and expenditures only when money actually

comes in and out of your agency. The second, accrual

accounting, records expenses and sales when they take

place, regardless of whether or not invoices have been paid

or funds have been received. These two methods have their

pros and cons, and you should examine both to see which is

a better fit for your agency.

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Cash Accounting

+ Shows a clear record of your agency’s cash flow

+ Takes less time to learn and explain

+ Gives clear picture of funds in your accounts

- Makes it difficult to keep track of open invoices

- Shows misleading picture of your profitability

month to month

- Poses problems when cash flow is low

Accrual Accounting

+ Shows true finances as it captures money owed,

not just money in the bank

+ Providers clearer view of long-term profitability

+ Makes it easy to follow up on receivables

- Takes more time to learn and understand

- Gives false picture of cash flow

- Requires professional input to set up and run

Before making a decision, talk things through with your agency’s accountant or accounting team.

Keep in mind,

if you are changing from one method to another you will need approval from the IRS before proceeding.

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Making a

ChangeAlthough each accounting type has its own benefits and drawbacks,

most insurance agencies tend to use an accrual accounting system.

If you’re using a cash system you may find that, as your agency

grows, you are outgrowing the cash accounting method. As you start

to think about switching to accrual, you should take a step back and

ask yourself a few questions.

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1.Although the IRS requires certain types of businesses to use

accrual accounting, it is unlikely your agency is required by law

to switch. However, you should consider switching if:

n You are tracking your profitability over the long-term

n You have more than a handful of employees—salaries tend

to operate better with an accrual system as there may be

times you don’t physically have the cash to pay your staff

n You talked with other agencies in your management

system’s user group and find many use the accrual system

If you identify with two or more of these criteria, switching to the

accrual accounting system is the right move for your agency.

Once you know you need to switch, start creating a plan by

asking yourself the following questions.

Do I needto switch?

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2.There is no “universal” perfect time

to switch. It will be different for every

agency. Think about your year: is there

a time when things are a little slower?

This is the right time to make the switch

to a new system. If there isn’t an easily

identifiably slow time, your best option is

to change systems at the beginning of

your fiscal year.

When will I switch?

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3.Your employees should definitely be in on your accounting system

change. The best way to get the word out is to assign a small team to

head up the switch. Have them create a timeline, document the new

process, and organize training. Eventually everyone in your agency

should be well versed on your new system and know their place in

the process.

Another very important group that needs to know you’re

changing accounting systems is the IRS. The IRS requires any

company or organization switching accounting methods to fill out

Form 3115 - Application for Change in Accounting Method. You

MUST file this form within 180 days (about 6 months) of the end of

the year in order to make your switch.

Who needs to know?

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4.Take a look at the accounting system you’re using.

Most agencies use Quickbooks or an accounting

system that integrates with their agency management

system. No matter what you’re using, however, things

are going to change. Talk with your provider to find

out what you need to do to prepare and start making

adjustments sooner rather than later. As with anything

new, you will have a learning curve. Take your time

and make sure you know what you’re doing, and be

patient with mistakes. Remember, you didn’t learn

your current system overnight, either!

How will things change?

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Integrating Accounting with your Agency Management System

Regardless of whether you use cash or accrual accounting,

we highly recommend using an agency management system

with an integrated accounting feature. The benefit of this

is that all of your agency data is stored in one place. This

makes tracking and reporting on finances much easier, and

creates a streamlined system that ties all aspects of your

prospect-to-client process together in one place.

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Integrated Accounting Benefits

n PROCESSES DATA DAILY:

Once you’ve set all your

invoices, payments, etc. they’ll

process automatically on the

dates you’ve set.

n PROVIDES DIRECT BILL

COMMISSION DOWNLOAD:

This capability dramatically

reduces duplicate data entry by

ensuring data accuracy, saving

your agency hundreds of work

hours.

n CREATES EXPENSE

REPORTS: With integrated

accounting, you can easily select

the data you need and create

a plain or visually interesting

expense report in minutes.

n OFFERS EASY BRANCH

ACCOUNTING: For agencies

that handle multiple insurance

types, integrated accounting

makes it easy to view financial

information for each branch

separately.

n SHOWS COMPLETE CLIENT

RECORDS: You can see all

financial activity from each client

in one place, making it easy

to see total financial history

including prices of assets, policy

costs and payment information.

n INCREASES ACCESS TO

FINANCIAL INFO: Since your

accounting is linked with your

agency management system,

you can access it just as

easily as any other part of your

management system

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The better agency management

system providers offer integrated

accounting as an add-on to

the basic system. We suggest

you consider adding it to your

processes. Not only are the

benefits of integrated accounting

endless, it will end up paying for

itself with the time and money

you’ll save.

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Calculating

CommissionIf you’re tracking your agency’s premiums and commissions by Excel,

STOP right now. Back away slowly from your computer…you don’t need

to do this! Using Excel to track your commissions is like using a pair of

scissors to cut your lawn: it gets the job done, but it is painstakingly slow

and prone to human error.

You want a system that is easy—where you just input premiums and pay out

months and you get your commissions in one keystroke. You want something that

shows your total commission minus lead costs and other factors.

There is a better way.

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When looking at accounting systems, be sure to find one

that breaks down commissions and premiums by:

n LINE OF BUSINESS: By

analyzing commission by line of

business, you can get a good

picture of your strongest and

weakest service lines. This will

help you determine if you need to

put more resources towards one

service line over others.

n PRODUCER: Breaking down

commission by producer allows

you to see who is doing well

and who needs to step up.

This type of data also makes

it easier for your producers to

calculate income.

n CARRIER: Breaking down

commissions by carrier helps

you see which carriers owe

commission to you and/or your

producers. This can help you

determine whether or not you

need to drop carriers that aren’t

bringing in enough business.

In addition to these

breakdowns, you should

also look for an accounting

system that offers…

n *PRE-CREATED REPORTS

that likely cover the above

breakdown options, along with

options such as year-to-year

comparison reports, marketing

campaign reports, and

personal lines to commercial

lines comparisons.

n *CUSTOMIZED REPORTS

that give you the freedom to

create specific data outputs

for the needs of a certain

carrier, producer, or employee

as needed.

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Taking the Next Step

We hope this eGuide has given you some food for thought and caused you to

consider some changes in your agency’s accounting procedures, tools and practices.

As you move forward, consult with your agency management system provider and

your user groups to make a plan on how to upgrade your accounting practices.

If your agency management doesn’t include integrated accounting, or if you

are considering a new management system, we urge you to speak to an SIS

representative today to find out if our system is right for you. Contact us today at

800.747.9273 or sales@sisware.com.

View a short demo of Partner XE Accounting

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About SISHeadquartered in Columbus, Ohio, Strategic Insurance Software (SIS) is

the team behind Partner XE—an innovative web-based insurance agency

management system that helps independent agencies streamline workflow

and grow their business. Built on a foundation of strong technology and

exceptional service, we’re moving forward with a constant eye on innovation

that will make independent agents’ lives easier.

About Partner XESupporting downloads from nearly 300 carriers, real time interaction,

integrated agency accounting, and much more, Partner XE is a full-featured

agency management system at an affordable cost for the independent

insurance agency. For more information, please visit www.sisware.com

4181 Arlingate Plaza, Columbus, Ohio 43228 | 800.747.9273 | www.sisware.com