Why Bookkeeping Is The Key to Business Intelligence For Insurance Agents

In the first recorded book published on the subject of accounting (Summa de Arithmetica, 1494) Luca Pacioli quotes the following: 

“Three things are needed by anyone who wishes to carry on business carefully: 

  1. Cash and/or credit
  2. A good accountant
  3. Proper internal control”

It is as true today as it was in 1494. A business owner’s effectiveness hinges on the quality of the data they review. In our industry, we often prioritize reports related to customer-facing processes such as retention, new business, cancellations, and customer-to-account manager ratios. These are important metrics, no doubt, but unfortunately, financial statements and their potential insights tend to rank lower in importance. While it would be difficult to assert that one area of the business is always more important than another, ultimately it’s the profitability of the business that will determine its ability to remain in existence. While client and policy level activities are drivers of the financial performance of an agency, these activities only matter or can be described to have contributed in a positive way if there is cash in the bank! 

Bookkeeping vs Accounting

At its core, bookkeeping is the method by which we meticulously document financial transactions within a business. It encompasses all monetary flows in and out of an organization, even the less visible transactions like depreciation and amortization. Proper bookkeeping accomplishes two crucial tasks: 1. it identifies an organization’s revenue and expenses while 2. accurately recording its assets and liabilities. It stands as the primary source of truth for almost every metric and data point that influences decision-making within an organization. With this, bookkeeping serves as the bedrock upon which all financial decisions should be built.

Beyond everyday tasks such as bill payments, deposit recording, bank balance monitoring, and payroll management, proper bookkeeping equips an organization with the data required to manage proper accounting functions, like creating financial statements, filing tax returns punctually, and complying with governmental agencies. 

Said differently, accounting is the framework that translates bookkeeping into reporting, insights, and actionable intelligence. Accounting converts the bookkeeping streams and output into a financial narrative for analysis, interpretation, and decision-making. Accounting in the form that we know it today would not be possible without solid bookkeeping. In this way, we can think of bookkeeping as “powering” accounting. 

Bookkeeping and accounting are different but co-dependent. 

How is Bookkeeping for an Insurance Agency Different?

While an insurance agency shares typical operating expenses like rent, utilities, and payroll with other businesses, it generates revenue in a unique way, leading to a substantially different Chart of Accounts compared to other industries. Revenue can be dissected into categories like personal/commercial lines, direct bill/agency bill, and more. Moreover, agencies have distinct expense categories such as producer expense, underwriting expense, and E&O insurance.

If an agency handles customer funds, the complexity of the Chart of Accounts escalates. Properly accounting for items like retained commissions, agency/broker fees, and sweep payments becomes essential. Regulatory agencies enforce stringent recordkeeping requirements, making accurate processing even more crucial if the agency acts as a fiduciary.

Where Do We Go from Here?

As insurance agency owners, we bear the responsibility of running our businesses to the best of our abilities, identifying areas for improvement, and acknowledging our shortcomings. Correct financial statements are essential for evaluating and analyzing agencies effectively and making informed decisions.

This weekly series will delve into all facets of bookkeeping, accounting, and finance — workflow, insights, trends — alongside topics like the history of accounting and bookkeeping, management and leadership theories, software setup options, and other back-office/operations subjects. Stay tuned!

About Crystal Temple

Crystal has spent nearly two decades focused exclusively on accounting and bookkeeping for insurance brokers. She has founded multiple bookkeeping groups, one of which was acquired by a prominent AMS provider. Crystal has also served as a controller of an agency group that acquired over 50 agencies in a two-year timeframe. She is the co-founder of a startup called Ricono, building a platform to address some of the technology deficiencies brokers face when trying to measure and manage their financial operations.

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