Independent insurance agencies typically hold a major asset ontheir balance sheets: the (often significant) cash in their bankaccounts.

However much money it is, cash is a short-term asset—but onewith long-term implications.

As the agency principal, have youanalyzed this asset lately—in the same way you've evaluated yourproducer team, agency-management system, carrier contracts or bookof business?

The principal needs to take an analytical, dispassionate look athis or her cash management: By doing so, the owner may be able toimprove the agency's profitability.

An agency may think that as long as it carries large balances inits checking accounts, it will not pay service charges. But agencyowners need to understand the importance of carrying those balanceseffectively every month to not only offset service charges, butalso to manage both the unique liquidity and rate of return on thedollars.

All banks offer business-deposit products such as checking andsavings accounts. However, a good banker will recognize theinsurance agency's unique cash-management needs and will work withthe agency owner to become familiar with the business's cash flowand financial goals. A hands-on banker will periodically perform anaccount analysis.

The good banker, in effect, will create a banking package thatincludes investment options for the funds (within the agency'sliquidity needs); and a checking account for day-to-daytransactions with balances needed to offset monthly servicecharges.

These accounts—coupled with a state-of-the-art online bankingand reporting system—can help the agency enhance revenues, reduceexpenses and streamline efficiencies.

A $2,000 DIFFERENCE

To understand how effective a properly managed banking packagecan be, here are two examples of agencies carrying an averagemonthly balance of $350,000.

Agency A carries its $350,000 balance in a checking account andsucceeds only in offsetting the $50 monthly service charge ($600annually) with the earnings allowance. However, the agency is nottaking into consideration the excess balance available forinvestment.

On the other hand, Agency B has discussed with its banker theaverage monthly balance it expects to carry, its monthly outgoingexpenses and its financial goals for investments.

At an earnings allowance rate of 0.6 percent annual percentageyield (APY), the banker and the agency principal determined that$100,000 is the required balance to offset the $50 monthly servicecharge ($600 annually) and that the additional $250,000 isavailable for investment.

Based on liquidity needs, Agency B's $250,000 is placed in asavings vehicle—a business money-market account. The account earnsa 0.8 percent APY and allows for up to six withdrawals permonth.

Agency B therefore earns interest on the $250,000 and cantransfer funds to the checking account to cover monthlydisbursements. This results in annual cost savings and increasedrevenue of $2,600 contributing to the agency's overallprofitability.

Other investment options includea variety of CD programs, such as matching-maturity CDs and CDladders, which allow an agency to match the maturity dates tofinancial demands.

Agencies also can use a sweep account that automatically sweepsexcess cash into an overnight investment account.

A comprehensive online-banking system complements thedeposit-services banking package and can significantly improveworkflow efficiencies and cash flow.

A solid system will offer real-time account history, balancetransfers, direct deposit of payroll, wire transfer and ACH(automated clearing house) capabilities. In addition, remotedeposit allows an agency to electronically deposit checks from itsoffice.

Working with a banker that has the insights and flexibility toperform this type of account analysis, based on the agency'sparticular needs and cash flows, provides the agency principal withanother tool to help the agency grow and prosper.