A comprehensive cash management plan is vital to any business.

For independent insurance agencies and brokerage firms, cash management is unique — calling for a focused, strong cash management system provided by the agency’s banking institution.

Most agencies would equate effective cash management with tasks performed by a chief financial officer such as: analyzing the agency’s current situation, defining a cyclical pattern of cash flow and forecasting future cash flows. But agencies should expect their bank’s experience, products and services to contribute to the overall plan.

The ultimate goal of a strong cash management system for every insurance agency should be to enhance revenues, reduce expenses and improve efficiencies. When you accomplish this, you create value for your agency and add to the bottom line.

An efficient, properly managed cash management system usually consists of three components.

1. Technology is front and center.

New technologies and solutions have made it possible for agencies to adopt more accurate and reliable cash management strategies. Agencies are seeking customized solutions depending on the unique cash management challenges that they face. The connectivity and convenience must be matched with complete security that make sure the information about the agency’s cash policies and transactions remain private and secure at all times.

An agency’s premium payments, carrier payables and receivables can be managed largely by automated solutions. These technology improvements allow an opportunity to deploy excess cash into short-term investments. Technology that integrates with a good cash management system will eliminate the manual processing, and reduce the time spent by agency employees on these transactions. The information is then compiled into effective reports for use by management.

Be sure the system your bank provides includes good client support, appropriate levels of security, controls and reliable equipment. Inadequacies in any of these areas can be costly to an agency in the long run.

Advances in technology allow multiple users to sign on with designated roles, preset by the agency principal. Delegating roles increases the agency’s efficiency by setting up the agency to handle funds in the most-expeditious manner. Time is money. The faster the agency funds are handled, the more efficient the agency becomes.

2. Know how to strike the right balance.

This is of equal importance to technology. There is a right balance between having too much cash on hand, out of precaution, and having an inadequate supply.

If an agency has too much cash, it is missing out on opportunities to invest the cash and generate additional earnings. On the other hand, if it doesn’t have an adequate supply of cash, it will have to borrow money, and pay interest or sell off its liquid investments to generate the cash it needs. Successful cash management involves not only avoiding insolvency, but also selecting appropriate short-term investment vehicles, and increasing cash on hand to improve the agency’s cash position and profitability.

A strong cash management program will let you use idle cash that might otherwise stagnate in a checking account. It’s important that you consider a variety of investment products with flexible terms to accommodate your unique cash flow needs.

Products such as a sweep account or zero-balance checking accounts allow you to keep unused funds earning returns in a variety of investment accounts, while automatically sweeping funds to and/or from your operating accounts when needed. These products allow you to manage everyday transactions while supporting your long and short-term investment goals.

3. Review your fee structure on your banking relationship at least annually.

Earnings credit rates and target balance requirements are important to your bottom line. The earnings credit on your bank account can offset the cost of deposit account services.

Charges such as monthly maintenance fees, checks paid and items deposited can add up quickly and affect profitability. So you should be discussing your agency’s cash flow patterns over the course of the year and make any necessary adjustments to set a target balance at the right level.

Consult with your banker, discuss changes to your agency’s cash flow patterns and agency goals, and make adjustments that make sense based on your financial needs. Does this sound familiar? Independent agents and brokers take this same mindset when serving clients!

Patricia Smith is vice president and business development officer of InsurBanc, a Division of Connecticut Community Bank, N.A. She can be reached at psmith@InsurBanc.com and (866) 467-2262.

Special Reports /

3 keys to effective cash management for your insurance agency

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