Many insurance industry professionals focus most of their attention on the top-line of their business. Where sales are heading? What's happening to premiums? What about my commission?
This approach can be detrimental to bottom-line results that are equally important to their growth.
Over the years, there have been many examples of major companies focusing on their top-line through price increases and acquisition, while failing to pay enough attention to costs that were dragging them down.
More recent industry examples include:
- A large underwriting agent that has focused on growing the top line for the last five years at the expense of underwriting discipline. The business is now in the process of portfolio remediation, meaning in some cases, premiums are rising by 200 to 300 per cent
- Players who say they are growing organically when in reality, they are increasing premiums, but not necessarily the number of customer relationships. You need to grow both
- Brokers and agencies who have seen their income pushed by substantial premium increases and find labour costs going through the roof. Hiring new staff is really tough at the moment, both in terms of the process and the salary shock.
These companies are suffering erosion to their profit margins.
How to be profitable
Often, the most profitable companies are small, nimble owner-operated businesses that focus closely on expenses and the bottom-line alongside business development.
We all know the frugal operator that has watched the pennies to find that when they go to sell their business, they achieve an outstanding result. That’s because business valuations tend to focus on the bottom-line rather than the top-line.
Here are some tips to keep in mind for managing your bottom-line:
1. Saving a Dollar
Depending on your business model and its inherent margins, an additional $1.00 of revenue can drive an additional 15 to 20 cents of profit to the bottom line.
In high margin businesses that extra dollar saved will go even further for the bottom line.
On the other hand, saving a dollar of your expenses will directly drive an additional $1.00 of profit. Saving costs go straight to the bottom line, so 100 per cent of any initiative you put in place to improve efficiency will have an immediate and enduring benefit for the business.
Permanent cost savings will keep adding to the bottom-line provided the expenses are incurred as a result of inefficiencies.
2. Understand CAPEX vs OPEX
When managing expenses, its important to differentiate between capital expenditure (CAPEX) and operating expenses (OPEX). OPEX savings will give you that bottom-line impact immediately.
CAPEX on the other hand involves committing capital to invest in longer-term improvements to your business.
For example, depending on your tax and accounting advice, the initial set up, development and transition costs of a new broking or underwriting platform can generally be capitalised and written off over a period of time.
However, be mindful that the business case for any such investment should incorporate an evaluation of the ongoing cost savings that it could produce.
Many tech investment business cases include project cost and headcount savings, so if yours flags headcount savings, consider asking for the names and job roles involved and see if this is ever achieved.
3. Grow the value of your business
The true benefit of a bottom-line or cost focus comes when you are looking at selling or valuing a business.
If we take a $1.00 increase in revenue, with a business that operates on a 20 per cent profit margin, the impact of that increase in revenue on the value of your business could be between $1.60 and $2.00, assuming a business valuation earnings multiple of 8-10 times.
However, $1.00 saved in expenses could mean your business is worth $8-10.00 more. There is a big difference between $2.00 and $10.00!
Taking this into account, your business could literally be worth millions more if you focus on the bottom line whilst you are growing it.
4. Invest in labour saving technology
In the current environment, the best way to create cost savings is to invest in labour saving technologies and platforms.
The cost of staff is steep and rising, and often not very efficient.
Therefore, automate and eliminate rather than cutting costs in client services or business development activities.
And, when it comes to that technology business case, have it done by people who understand the genuine savings the solution can achieve, backed up by previous implementation data to justify the up-front capital cost involved.