Cleaning Up Financial Reporting

This post is part of a series sponsored by InsurBanc.

Applying for an agency loan can be stalled by poor financial reporting practices. Here’s what lenders expect.

I was recently reviewing a loan application from an independent insurance agency when I ran into a not uncommon situation: The agency’s internally prepared financial statements required accounting adjustments. This particular agency reported the operations of multiple office locations under one entity, resulting in errors on its financial reporting.

In a situation like this, the lender should question the erroneous accounting entries. My communication to the agency was to work with its bookkeeper or accountant and make the necessary adjustments to properly account for the entries in question.

Independent agents, particularly those borrowing for the first time, may run into similar problems when a merger or acquisition opportunity is presented, or when they go to sell their agency. Having good quality tax returns, accurate internally prepared financial statements that include production reporting, a budget or financial projections, allows an agency owner to make better decisions when managing business operations and a bank to determine if the agency is creditworthy.

With more than 22 years of experience servicing the independent agency community, InsurBanc has the expertise to provide guidance on good financial reporting practices for independent agents who are seeking to grow, merge or sell their agency business. Some tips:

  • Do not wait until there is an actual need to improve your financial reporting.
  • Review your agency’s financial condition and reporting at least annually.
  • Keep your financial statements, tax returns and production reporting accessible.
  • Review and correct errors, inconsistencies and inaccuracies in internally prepared financial statements timely.
  • Make sure you understand and can discuss with your lender or a prospective buyer or partner your agency’s financial reporting and tax returns.
  • Be able to discuss your book of business, including revenue mix by commercial and personal lines, direct or indirect bill, lines of coverage and concentration issues with any of your agency’s clients or carriers.
  • Work with a bookkeeper or accountant who understands the unique requirements of accounting rules and best practices for independent insurance agencies.

I can’t stress enough how important it is to have detailed and accurate financial statements. We’ve worked with numerous agencies over the years, and it becomes challenging when we’re presented with an opportunity to make a loan, and we receive internally prepared financial statements that require accounting adjustments or production reporting that lacks detail. Working with your bookkeeper or accountant to make corrections and adjustments takes time, which may impact any transaction being contemplated. And that’s not to say the agency has a poor financial condition or is not performing well. It’s the information in the financial reporting: If it doesn’t speak to us, it’s difficult to provide financing.

Also make sure you understand the full capabilities of your agency management system and ensure its accounting component is designed for independent insurance agencies. Whether your agency is large or small, an agency management system can improve efficiencies and reduce costs. Agents can quickly access information on the book of business, management reports on sales growth, production reports, profit and loss reports, cash flow, accounts receivable and payables. An industry lender should know to ask for this information when qualifying an agency for a loan.

Having accurate financial reporting allows agency owners to make better business decisions and provides comfort to a lender or potential buyer. By incorporating the above practices into your agency’s daily operations, you will have a better chance of avoiding the common errors we see in financial reporting. In addition, you will better position your agency to take advantage of an opportunity to make an acquisition, merge or sell. Accurate financial reporting and understanding the makeup of your agency’s book of business also can lead to better pricing and terms for an agency owner.

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