How to create a successful agency budget

You need these numbers before starting the process.

How to create a successful agency budget

Agency leader Jason Staas, FCIF, CLTC, describes the process of budgeting as a sophisticated series of assumptions, all supported by data. 

"Looking at large-scale data across all markets in my territory, it takes 3.8 appointments to make a sale, and the average sale is about $2,000 of premium," said Staas, from Dayton, Ohio, USA. "I can make some pretty predictable business plans based on those tried-and-true ratios. I know it takes about 10 contact attempts to make a contact. I know it takes about three contacts to set an appointment, and then I know it takes 3.8 appointments to make a sale, and then I know what the average revenue per sale is. There's the structure." 

As agency leaders begin developing their budget for the year, some start with revenue estimates as the driver. 

However, in Singapore, Cheng Huann Yeoh, ChFC, CLU, leads an agency that prefers to extrapolate from last year's numbers. 

"We look at revenue," he said. "That gives us the base, and then we look at the projected revenue for the coming year, and then we do somewhere in between." 

Robert Abbate, LUTCF, CSA, of Richmond, Virginia, USA, relies on formulas like the one Staas outlined, but also solicits the advice of his accountants, who understand his cash flow well after years of preparing his taxes. 

"Accountants set up our estimates," he said. "As long as you follow your estimates, you know your estimated annual expenses, which are broken down into quarters. Sometimes at the end of the year, you'll get a phone call from your accountant saying, 'Hey, congratulations, you're having a great year. You need to go out and spend X number of dollars on a vehicle.' Those things do happen, occasionally." 

The budgeting process 

All three agency leaders revealed that the bulk of their budgeting process happens toward the end of the year. At Yeoh's agency, the goal is to have discussions throughout October and a finalized budget by the end of November. Much of the detailed work is assigned to various committees made up of different leaders. The leaders determine the needs for their personal committee and then come together as a group to hash out overall allocation. 

Unlike Yeoh, Abbate has the final say on budgeting decisions at his agency, although he's quick to point out that business strategy is a collaborative process with many seats at the table. He focuses most intently on budgeting in December, but says that budgeting is never really a complete process. 

"In our world of financial services and insurance protection, you are always presented with opportunities," he said. "It's not uncommon for something around the first quarter of the year to come up that we didn't see coming that we think would be a good idea to get involved in. And then we have to find the money to do it." 

It's also important for agency leaders to decide what will not be funded. 

"When we go through the process, there's always 2,000 things that you want to run, and you are always limited by the resource," Yeoh said. "But the conversation, that's really the toughest one — how do you pick a favorite child?" 

Ultimately, it comes down to priority. The most essential business items are funded first. After that, they can allocate what's left to wish-list items. 

What budgeting looks like at one Singapore agency 

Three of the four top expenditures at Yeoh’s agency are recruiting, training and cohesion events. Yeoh didn't reveal the exact percentages his agency spends in these areas, but he and other agency leaders said they try to spend 20% of revenue on support staff, which is the top spending item above the three buckets listed here. 

Recruiting is split roughly 80/20 between two channels. The first are big recruiting parties thrown at least 20 times each year. Far from being a typical job fair or expo, these are essentially staff parties meant to showcase advisor life to potential new hires and invited friends of advisors. 

They often center around activities like bowling or badminton. Other times, Yeoh himself will host advisors and their guests — all family members or potential recruits — at his house. These events are in response to one year’s worth of data showing that team-member referrals are the agency’s most common source of new advisors. So, the decision was made to put resources into events such as these.

The other 20% of the recruiting budget at Yeoh's agency is spent on campus outreach. These funds are spent on sponsorship, which gets them access to college students. This area of spending acutely demonstrates the need for proper budgeting, as Yeoh said it was an area where the leadership team realized it was overspending. Initially, half of all recruiting funds were allocated for campus outreach, but cost overruns and a lack of return convinced the agency it was time to scale back. 

"Our budgeting for recruitment is basically 50/50 — 50% on warm market and 50% on cold market, which is the campus outreach part," Yeoh said. "It took us about two or three years to realize that the efficiency of that is not as high as the warm market one. We were super over-budget, like up to 40%-50% at that point, but we learned from there.” 

The training budget goes toward costs that can be described as team development, meaning the benefits are intended for more than a single advisor. Driving up the costs of this area are expenses related to travel, conference attendance and hosting guest speakers at internal seminars. There is also a line item for quarterly reviews. 

"We all get together to look at the numbers and then to strategize what's next for the quarter. So, we have a subsidized rate for those events also." 

Finally, cohesion events are essentially team-building times for socializing. At times, they overlap with the warm recruiting events, but they receive a separate carve-out so they will happen regardless of whether the team is trying to recruit or not. 

"Basically, we go out to have fun, to get together," Yeoh said. "We do all sorts of things for that around the island — treasure hunt, even a simple end-of-the-year barbecue. We place quite a significant budget on that." 

What budgeting looks like at one U.S. agency 

Budgetary concerns are vastly different inside Abbate’s agency. The top expense there is personnel, which runs close to $60,000 per month to cover costs for a 17-person support staff. This figure does not include money for a new human resources administrator, which Abbate said is his most expensive support-staff hire ever. But he was able to find the money for the position thanks to a combination of solid budgetary practices and tremendous business performance this year. 

"Our profits are up 17.5% over last year," he said. "Last year was already a record profit year for us, as was the year before. But the previous years, we were only up like 6%." 

Some of the money for the new position was reallocated from budgeted marketing costs, which comprise another significant expense for Abbate's agency. He covers the costs of numerous local and regional sponsorships that run across multiple sales territories. 

"They're all over the board, but they are all about brand," he said. "Sponsorships are typically not call-to-action events. They're typically branding events. One great example: One of my clients runs an Octoberfest in Richmond, which tens of thousands of people come to every year." 

He also budgets money for newspaper contracts and digital advertising. He's even recently contracted with a marketing email vendor to lead a drip campaign intended to recruit more advisors. 

What about office space? 

The overhead for running a business out of a physical space could be thought of as a significant budget item, but interestingly, Yeoh's agency doesn’t pay any rent for its space, and Abbate's agency has limited its obligations there. Yeoh's agency has an agreement with the insurance company structured so that no rent needs to be paid if the agency meets certain production targets. 

"So far, we have been meeting those, so in that way, we do not budget for office space." 

While Abbate does need to budget money for his corporate office, expenses at the eight satellite offices are split between his agency and the advisors. But, because Abbate's agency owns its corporate office, it also can be listed as an asset in financial reports, putting it in a somewhat different category. 

"Every year, the value goes up," he said. "So, that's sort of like you're investing in that one." 

Making it a priority to not spend money 

One final category of most budgets is unallocated funds. Yeoh's agency prefers to keep 10% of expected revenue untouched after a budget is finalized. That way, some money will be available should unexpected expenses arise during the year. 

Abbate, too, has funds set aside, just in case. 

"Running a business isn't much different than running a personal family household," he said. "There's going to be something that happens you don't know. You don't know when the air conditioning system's going to go out on you, but you have to have a contingency fund. And sometimes, early on in our career, we didn't have the cash, and so we were using the company credit card for some things." 

Abbate takes this one step further by over-budgeting on some projected expenses to cover the needs for overruns that occur in the moment. 

"Let's say we're budgeting for an expansion into another office location," he said. "That office location is going to cost us about $27,000 in furnishings. We'll probably put another $5,000 or $6,000 into that budget, knowing full well that we're not going to use all of it, but also understanding something in that building is going to show up that we didn't anticipate that we're going to have to fix." 

The path to effective budget management begins with understanding the numbers, setting priorities and staying agile in the face of change. Designing a clear roadmap that all stakeholders can agree to, while allowing for flexibility down the road, removes setbacks that come from unforeseen expenses. It’s not always the easiest process, but it’s one that makes any leader’s job easier. 

Contact: Robert Abbate  

Cheng Huann Yeoh 

Jason Staas