The importance of budgeting and forecasting

Here are the key steps:

1. Set realistic sales projections
Never arbitrarily project your sales. Too many agency principals predict sales by picking a figure out of the blue rather than analyzing past performance and anticipating future sales. Some show sales growing exponentially to impress a potential buyer or lender, but these predictions are typically far from the truth.
To develop a realistic forecast, evaluate your agency's resources and the market conditions. Take an honest look at how your book has performed over time, assessing client retention, account size, loss ratios, economic climate and other factors. This will provide an accurate picture of sales volumes over the next 1, 3 or 5 years. Also review current economic and business conditions to assess their impact on your business and your goals.

2. Estimate expenses accurately
Review the past few years to ensure that you're tracking all upcoming expenses, accounting for any changes in the cost of equipment rentals, rent, payroll, marketing and overhead. Be careful not to omit or underestimate expenses, and keep a close eye on what's being spent to see if you can accomplish your goals for less. And remember to allocate for tax payments and other annual costs.

(Read an article, "Make cash king: Better cash management makes agencies more profitable.")

3. Prepare for the unexpected
No matter how efficiently you run your business and how carefully you track expenses, there is always something that you couldn't or didn't plan for. Account for the unexpected in your budget so you can continue to achieve these objectives, even when changes occur along the way:
o Meet payroll–without the same contingency bonus that was received in the past few years.
o Continue paying operating expenses–even if the soft market continues.
o Continue generating a significant number of leads and closing sales–even if your top producer departs.

4. Analyze growth opportunities
As time passes, your budgeting and forecasting model will also enable you to confidently answer these and other questions about investing in your agency's growth:
o Can I afford to hire another producer?
o How many new policies do we need to write to justify spending additional dollars on marketing?
o Can I afford the debt service on a loan taken out to acquire an agency or book of business?

5. Just do it!
Budgeting and forecasting can be simple or complex, depending on your needs. Whether you use a software program like Quicken, a handwritten ledger or a piece of paper, just get it done, ideally every month.

Whatever system you choose, organize the numbers so they're easily accessible to you. Each month, compare your actual numbers with the ones in your budget. Run a reality check on these numbers by comparing them against historical performance and changes in variables such as commission rates, loss claims and contingencies.

If expenses rise more than expected or you're not collecting payments as quickly as you predicted, adjust accordingly for the next few months. And if certain costs are considerably higher than normal, review receipts and figure out where the money is going.

6. Tap the power of cash flow
Don't try to run your agency on gut feel and intuition alone, especially in today's uncertain economy. Create a budgeting and forecasting model so you can make sound decisions that can dramatically enhance your agency's performance. Give yourself the power of a healthy cash flow–and chart a path to a successful future.

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Rick Dennen is CEO of Indianapolis-based Oak Street Funding (www.oakstreetfunding.com), a family of diversified financial services companies that offers commission-based commercial financing through lending or purchasing of commissions and third-party loan servicing for banks and financial institutions.