Understanding financial statements is crucially important for insurance agency owners to run a successful business. We'll break down the essentials of three major financial statements - the profit and loss statement, the balance sheet, and the statement of cash flows. As an insurance agency owner, knowing how to use these resources will empower you to make informed decisions, optimize performance, ensure the financial health of your business, and help you achieve your financial goals.
Think of the balance sheet as a snapshot of your agency's financial position at a specific point in time. It outlines your assets, liabilities, and equity. It helps you know how your agency's resources are financed and the role equity plays in representing the owner's interest in the value of the company. Are you using debt or liabilities to finance growth? Do you have a positive tangible net worth with retained earnings and reserves to cash flow growth investments?
The balance sheet equation is Assets = Liabilities + Owner’s Equity. It’s important to work with your book keeper and CPA to ensure your chart of accounts and transactions are registered appropriately so that you can have easy access to these values within the agency.
There are financial ratios you can calculate from these balances which provide valuable insights into agency cash management, short-term payables, long-term liabilities, the tangible net worth of the business, and other metrics.
Cash is crucial, particularly for an insurance agency. The statement of cash flows reveals the movement of cash in and out of your agency. There are three main types of cash activities within a business: operating, investing, and financing activities. You can use the statement of cash flows to assess your agency's liquidity and cash-generating abilities. Understanding the nuances of cash flow enables you to manage day-to-day operations efficiently and plan for future growth.
The reason a statement of cash flows is important is because financing activities or some forms of owner compensation may not be recognized in the net income of the profit and loss statement. Good account reconciliations provide the necessary transaction detail that allows you to track and see the effects of net income, operating expenses, financing activities, and any potential owner compensation represented by draws or distributions.
Do you have a way to easily retrieve and analyze these financial statements in your agency? Or a financial operations plan to gather and use these statements as part of your leadership plan?
These statements hold a significant role as tools for measuring performance, benchmarking, strategic planning, and achieving your goals as an owner of the company. Knowing your numbers helps you take ownership of what you manage and is part of the roadmap for knowing how you should manage within your agency.
It is recommended that the agency leadership review their financial statements and progress to goals at the minimum quarterly but recommended monthly. If you are able, it’s good practice to set up a regular cadence with your bookkeeper or accountant to collect these statements monthly so that you have them available.
A core part of our Fractional CFO service for insurance agencies is having a monthly meeting to review your financial statements and progress to goals we establish together.
The role of the Chief Financial Officer is to manage the financial operations of the agency. This often includes tracking cash flow, financial analysis and planning, as well as an organizational strategy for optimizing financial goals. Growing agencies may not be at the stage of needing a full-time staff controller or CFO but can still benefit from CFO-level strategy during periods of growth or oversight for financial operations.
A Fractional CFO provides executive level resources and experience for growing agencies. Having a Fractional CFO within your agency will help utilize these financial statements and resources to report and support the agency’s key performance indicators (KPIs). An effective Fractional CFO for insurance agencies empowers owners to dedicate more of their time where it’s valuable and provides confidence in quick and effective financial decision making.
Want to learn more about your agency’s financial statements or how your agency could benefit from a Fractional CFO?