ACG - Agency Consulting Group

The PIPELINE

A national monthly newsletter for agency principals dedicated to agency management topic

Perpetuation Or Succession?

If you track your receivables the way most agencies do, you may be headed for trouble without knowing it.

Most agencies monitor their Aged Accounts Receivables (AAR) with a formula that does not accurately represent their collection success (or shortcomings). In times of growth, receivable percentages are artificially high when a downturn in premium writings is experienced. As illustrated below, most agency management software calculates AAR as a percentage of the total represented by each of 3 or 4 segments as shown below in month 1.

DISPLAY 1:

Sample – Month 1

Month Current 30 – 60 60 – 90 > 90 Total

1 $124,300 $37,500 $66,125 $105,200 $333,125

% 37.3% 11.25% 19.8% 31.6%

Sample – Month 2

Month Current 30 – 60 60 – 90 >90 Total

2 $265,000 $66,250 $31,750 $141,013 $504,013

% 52.6% 13.1% 6.3% 27.9%

The following month for our sample agency (Month 2) is also reflected above. The strict percentage indicators show a relatively good picture. Receivables over 90 days are down to 27.9% of the total. The 60 – 90 day receivables represent only 6.3% of the total and the 30 – 60 day receivables comprise 13.1%. Most of the receivables reside in the current column. However, the percent of each segment of receivables against the total of the month is a deceiving number. It does not evaluate the Collection Success Rate of the agency.

Display 2 below illustrates the calculation of the Collection Success Rate, defined as the percentage of the receivables in each category that was collected during the following month. Using this calculation to determine the success of the collection of those items in the Current category during Month 1 reveals that only 46.7% of those items in the current category in the first month had been collected by the second month.

The same formula applied to Month 1, 30 – 60 day category, reflects only a 15.3% Collection Success Rate. The final calculation of the 60 – 90 and Over 90 Day category requires a slight adjustment to the formula. The Month 1 60 – 90 and Over 90 Day catagories are combined. Month 2 Over 90 Day category is subtracted from the total and the resulting amount is divided by the Month 1 60 – 90 plus Over 90 Day categories (See Display 3 below). This calculation reveals a meager 17.7% Collection Success Rate for the oldest category of receivables in the agency.

DISPLAY 2:

Current 30 – 60

Month 1 $124,300

Month 2 66,250

$124,300 - $66,125 = $58,050 = Amount Collected

$58,050 / $124,300 = 46.7% = Collection Success Rate

DISPLAY 3:

60 – 90 >90

Month 1 $66,125 $105,200

Month 2 $141,013

$66,125 + $105,200 = $171,325 = Amount available to be collected in Month 2

$171,325 - $141,013= $30,312 =Amount actually collected in Month 2

$30,312 / $171,325 = 17.7% = Collection Success Rate

The examples illustrated above are extreme, but are meant to show that receivables measured the traditional way do not truly reflect the success of collections in an agency. The Agency Consulting Group has further instructions on the calculation of your agency's Collection Success Rate and would be happy to share them with you in hard copy or in a spread sheet. Please call our hot line (800-779-2430) for more information.