Brokerage Ops the March 2011 issue

How to Push Your Firm Ahead? Budget It

Embrace the elephant in the room. Your budget’s role has never been greater.
Posted on March 16, 2011

When it comes time for business planning, you probably look at the economic forecast and recent performance numbers put out by the government and economists at think tanks, right? You need to know what to expect so you can make those educated guesses about your business. But a glance at the headlines often reveals dueling economists with vastly different interpretations, and it can be maddening to figure out whom to trust.

They say numbers don’t lie. Right! We all know it’s pretty easy for a three to be dressed up as a nine. One little swoop of the pen and the future can look a lot rosier, or you are staring down gloom and doom.

So let’s start with these numbers: We are already in the third month of 2011, and the first quarter is coming to an end. I am sure that many brokerage leaders are looking at their numbers so far with a lot of trepidation. We’re all hoping that 2011 will treat us better than the past couple of years. But, to no one’s surprise, the market remains soft (the “new normal,” as some call it). The economy, while better, still has an awkward limp.

So this month, let’s talk numbers. Do they tell the whole truth, the partial truth, or not much truth at all, since you don’t control product rate and you certainly don’t control the economy?

Numbers tell much more than most people expect. Yes, I understand you can have a great management team, producers and client service staff, and still revenues and profits have decreased through no fault of your own. But do you truly understand your numbers? And, when faced with difficult realities, do you use the numbers to help you make better business decisions? Or should I say, make better proactive business decisions?

Over my 25-plus years of consulting, I have worked with many great agencies, yet I’ve also found that many agencies do not have a grasp of numbers and how to use them effectively. I’m sure you’ll read this and say, “That’s not me.” However, I would argue that many brokerage leaders really don’t understand that the proper use of the numbers can make the difference between financial success and failure. Or, at a minimum, they’re the tool to help your firm reach its potential.

Let’s stick with budgeting for now because it’s something many firms do poorly. Some don’t do it at all, yet it is critical in the successful management of a business. (By the way, plugging in “last year’s numbers plus five percent” is not budgeting!)


I have asked many clients over the years to explain to me what a budget is. Sometimes I get the blank stare, and some responses miss the bull’s-eye so far that the dart isn’t even in the same room, much less on the board. A budget is actually a flexible tool that management uses to achieve its strategic goals. That’s a pretty powerful statement.

Another way to look at a budget is as an action plan that translates your strategic goals and objectives into measureable quantities to allow you to make sound, fact-based strategic decisions. With these concepts in mind, how do you effectively use your budget to make you a better leader?

A budget is actually a flexible tool that management uses to achieve its strategic goals.

Consider reading “Budgeting: Seeing the Future” (Chapter 13 of Manager’s Toolkit: The 13 Skills Managers Need to Succeed, Harvard Business School, 2004). This provides a great overview of how to budget effectively.


A budget is not a static, once-a-year, get-it-over-with financial document. It is a living document that you use in business management throughout the year. There are four critical functions: planning, coordinating and communicating, monitoring progress, and evaluating performance.

  1. PLANNING — Use the planning process to make sure you have the resources to achieve your goals. To be effective, follow three components of planning:  
    • Choose goals. The goals could be as straightforward as 20% new business development or 10% organic growth.
    • Review options; predict results. Once you choose your goals—let’s assume 10% organic growth—what are the options available for attaining this goal? You may have various options to achieve your 10% goal, but also weigh the costs and risks of each option. This is part of the budget-planning process.
    • Decide options. Once you have reviewed your options and predicted the results of the available ones, the last step is deciding how to attain the desired goal. To get your 10% organic growth, for example, you might need to hire three new producers or increase cross-selling penetration.
  2. COORDINATING AND COMMUNICATING — Make sure you coordinate the planning and creation of your budget goals and communicate the overall financial goals and strategic objectives to all decision makers. These steps will ensure that all managers and leaders who have a vested interest in this process can work together to create a cohesive financial plan or budget. This sounds simple, but even for a small firm that has p-c and employee benefits divisions, coordinating and communicating during the budget process can be difficult. Different decision makers might have different agendas.
  3. MONITORING PROGRESS — This is often where effective budgeting breaks down. To use budgeting as a management tool in a proactive manner requires leaders to monitor and evaluate progress, identify variances as they occur and take corrective actions to stay on course. I can’t tell you how many firms I’ve worked with that could not explain why a variance exists. Every quarter—even better, every month—the firm should prepare a variance analysis that specifically identifies the reason for variances. Public companies are required to do this. It is called “Management’s Discussion and Analysis.” Why shouldn’t you? It is the only way to start implementing plans to correct variances early on.
  4. EVALUATING PERFORMANCE — This is crucial for a results-driven firm. Hold your people accountable for results, using a system of rewards and penalties. Most firms, even in their basic compensation plans for producers and account executives, have very little linkage between budget, actual results and achieving strategic goals and objectives. For those of you who know me, you know this drives me absolutely insane. I cannot see why any rational person or leader would not hold people accountable.


Here are some key factors in the budget process:

  1. TIME PERIOD — Most leaders put together a one-year budget. I am OK with this, as long as the budget is not prepared in late January for the upcoming year. It will take lead time to prepare. If it is a once-a-year budget, do it in the fall so that you can properly perform “what ifs” and decide on the options to help you achieve your strategic goals. Ideally, I like to see a three- to five-year budget that is updated quarterly, not annually.
  2. FIXED VERSUS ROLLING — A fixed budget that is not monitored and updated is useless. I firmly believe in the concept of a rolling forecast, in which you include the following:  
    • Original Budget — The numbers do not change.
    • Actual — I think you can figure this one out.
    • Forecast — This is the key. It is where you take your budget, update it for actual results and trends, and then forecast for the rest of the time period (whether a year or longer). The forecasts should be updated quarterly for most firms. Results-driven firms use forecasts to monitor and evaluate results. The rolling 12-month forecast takes results and folds them into a continuous 12-month period instead of just ending it at the end of the year. This method is the most effective process to analyze variances, take corrective action and update the budget numbers.
  3. ZERO-BASED BUDGETING — Most firms use incremental budgeting, which involves extrapolating from historical numbers and trends. This is clearly the easier process and, in some cases, can provide for very good budget numbers. I prefer zero-based budgeting, where you start each budget cycle at zero base and you build up by reviewing all assumptions, trends and performance. This requires much more time, but the outcome and analysis that generally comes from zero-based budgeting is more in-depth and results in better short- and long-term business decisions. Firms that practice zero-based budgeting generally tend to be top-performing brokerages that consistently outperform their peers in key metrics.
  4. TOP-DOWN VERSUS PARTICIPATORY BUDGETING — At many firms, top-down budgeting is the standard. The owners set the budget by themselves with little input from others. While this has some advantages, it can result in goals and objectives that are just not realistic. The budget loses credibility and does little to make sure monitoring and evaluating are done effectively.   Participatory budgeting includes in the process anyone responsible for achieving the company’s strategic goals. This process gets more difficult at larger firms. But if you believe in holding people accountable, why would you not make producers set new business development and retention goals? How else do you effectively implement a compensation system of rewards and penalties?
  5. WHAT-IF SCENARIOS — You will never be 100% accurate on your assumptions; therefore, effective budgeting often requires building budgets with “what-if” scenarios or sensitivity analyses to model the impact of incorrect assumptions. The ability to effectively prepare and analyze a sensitivity analysis will go a long way toward your ability to quickly take corrective action as trends and assumptions change.


We cannot have a discussion about budgeting without discussing assumptions. My first pet peeve is when I ask a client for the assumptions behind a budget and I get back a blank stare or a comment like, “Well, I knew what they were, so there was no reason to write them down.” This comment is from leaders who do not effectively communicate vision, mission, strategic goals and objectives to employees. The linkage is clear. Writing down assumptions and sharing them with employees are critical steps in the budgeting process. Here are a few budget assumptions to consider:

  • Revenue retention rate and factors behind the percentage
  • New business development (both written and earned)
  • Product rate trend
  • Economic and/or market impacts or trends
  • Detailed salary and benefits analysis (including new hires or terminations)
  • Capital and human investment (e.g., technology, producer reinvestment, etc.)
  • Client service costs
  • Operating cost trends by category.
A budget is not a static, once-a-year, get-it-over-with financial document.

While I am just scratching the surface, a review of key assumptions—and actually writing them down—will enhance the budgeting process by improving your ability to monitor, evaluate and take corrective action.

Hold your people accountable for results, using a system of rewards and penalties.

Many insurance leaders do not hold accounting or business degrees. They often feel that gut instinct and entrepreneurial experience will guide them to success. However, as a consultant, CPA and, most importantly, the current owner of a number of different businesses, I can assure you the time invested in developing and implementing an effective budgeting process can be a key variable in gaining a competitive advantage and achieving your fullest potential. The budgeting process is not the magic bullet to success, but it can be one of the differentiators between an average firm and an industry leader.

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