October 1, 2013
How to Stay in Balance!
2 min read
I find that most of us agency owners are not financiers. We are sales and marketing types usually and view accounting as a necessary evil at best. Consequently, we often don’t pay a lot of attention to it. Last time I mentioned just a few things to pay attention to on the P&L. I’d like to talk now about the Balance Sheet.
The Balance Sheet is an indispensable companion to the P&L. Without it you really have no idea where you are. It tells you how much you owe other people and when. It tells you how much people owe you and when (roughly). It should tell you how much cash in the bank you’ve actually got and it will tell you whether you have more value in cash, receivables and stuff than you owe.
The most important thing on the Balance Sheet, I think, is cash. Cash is everything to a small business. Receivables are nice if they show up as cash. Until then they are pretty worthless. So, I always want to know how much cash I’ve got RIGHT NOW compared to how much I owe RIGHT NOW. Some people get fancy and compare Current Assets (which includes receivables) with Current Liabilities (which includes payables) but I think that’s asking for trouble. If you always make sure you’ve got the cash in the bank to pay your current bills you’ll always be in business.
The second most important thing on your Balance Sheet is Accounts Receivable. That’s what people owe you. Can I tell you something? As a new and growing agency you should not have any accounts receivable. At least not from customers.
Your insurance carriers may owe you commissions on Direct Bill policies but you can’t put that on the Balance Sheet because you really never know how much it is. You may have a few premium financed receivables if you had any Agency Bill business. But I would recommend that you never have any customer receivables.
Why? Well, if you wanted to be a banker why are you an insurance agent? Agents are terrible collectors, are thinly capitalized and usually go broke if they finance customer receivables when they’re new in business. Don’t do it!
So, really, the Balance Sheet is most important for telling you if you can pay your bills due out of cash. If you can’t and are hoping receivables are going to bail you out you’re headed for trouble!
Next time I’ll give you a few rules of thumb which if you follow them will practically guarantee you stay in business and make a lot of money!