A MarshBerry Publication | Volume XXVIII, Issue 7 JULY 2012

Most successful agencies utilize a business plan to drive

their business activities during the year. And while 86%

of high-growth agencies update their business plan every

year, only 59% of average agencies do. Annual budgeting

is the lynchpin of any successful business plan and most

agencies build out their budget year-after-year, but

surprisingly, many do not. This issue of the MarshBerry

Letter will examine the importance of incorporating an

annual budget into your business plan and the value of

integrating a budget validation model.

Planning to Plan Your Growth10% growth goal. It does not take into account retention by

department, projected growth (or shrinkage) by department or

new business per producer to help validate the projected

growth by department. In order to reduce the inaccuracies

in this traditional approach and to create a more robust

budgeting tool, it is imperative to employ a validated budget

model into the process.

To build a validated budget model requires collaboration

among key agency leaders who use their experience and

sound judgment to balance expected organic revenue growth

from operations with actual production results from past

years to arrive at a goal that is achievable.

For example, if you have set a $50,000 minimum new

business goal for a producer who has not produced more

than $30,000 in any of the past eight 8 years, why are you

budgeting $50,000 again? As much as agency leadership

might want them to hit that minimum, it is completely

unrealistic and renders the budget model invalid. When

predicting the likely success of any producer, the best

indicator of future performance is past performance.

There are many benefits realized by including the production

staff that is responsible for driving agency growth at the

beginning of the budgeting process. Utilizing the granular

“ground-up” approach afforded in the validated budget

model will enable agencies to get a more realistic, accurate

and attainable budget model than what can be achieved

with a top-down approach.

The value of building a validated budget model is that it

allows you to accurately predict your revenue over the next

two to three years by taking into account your retention by

line (breaking it up into Commercial, Life & Health, Personal,

and other buckets) and adding your new business production

predictions which are tempered by looking back at historical

growth performance by producer. Additionally, the model

enables you to identify what changes you can make to the

existing equation to drive a different outcome such as

hiring additional producers or by providing sales training

to your current production staff.

The validated budget model serves helps the agency to

understand its current organizational capabilities and

identify the key drivers of historical growth performance.

But using a process that looks at your historical data and

business model is just the beginning. The model needs

Continued on Page 2

JULY 2012 • theMarshBerryLetter 1

FIGURE 1 Our Business Plan (check all that apply)

Source: MarshBerry Sales Management Best Practices Database

Of the agencies that actually do annual budgeting, many

do so with a half-hearted approach. One popular approach

entails simply adding 10% to last year’s revenue without any

other considerations. This method is extremely inaccurate

and rife with risk as there is no validation to support the

to include additional subjective and objective criteria

necessary to achieve sustainable and predictable

organic growth.

To be successful, agencies need to pinpoint what has

made them successful and repeat those things as much as

possible to help drive more growth. Alternatively, agencies

can examine what has hindered their growth and how to

we address the barriers to robust growth. By understanding

which division or product is driving your growth, you can

change the business resource allocations appropriately and

focus more on certain business practices or departments.

From the outset, long-term management practices can

be monitored, changed and tweaked to help the agency

reach its goals. For instance, hiring in the benefits division

can be increased or decreased accordingly to help hit the

projected growth goals in that department. Or, if you see

low retention in the commercial lines department, you can

expand your service offering to help improve the retention.

Now that we have established the importance of building a

validated budget model, we will now examine the particulars

on how to build one. First, build out the 4 basic components

of the model listed below:

1. Previous year’s commissions & fees

2. Projected new business numbers for the upcoming year

3. Estimated retention by department

4. Individual producer new business capabilities

The individual producer capabilities comprise the validation

part of the model as they will help validate the projected

new business numbers for the upcoming year. See Figure 2

below for a sample screen shot of a budget validation

model. The following section will detail how to construct

your own budget validation model.

Planning to Plan Your Growth Continued from Page 1

FIGURE 2 Sample Budget Validation Model

2 JULY 2012 • theMarshBerryLetter 1

JULY 2012 • theMarshBerryLetter 3

Section 1Section 1 is broken out by department and lists the previous

year’s commissions and fees. In this sample model, they only

have commercial, benefits, and personal lines departments.

As you follow the numbers throughout the model, you

will see that all numbers tie to the preceding numbers.

For example, section 2 adds the projected new business

based on section 1’s data. And section 3 deducts the

commissions and fees lost due to retention.

Section 2Section 2 is where you input the upcoming year’s new

business production. Again, this is broken out per department

so that it is more accurate in the validation process. You’ll

notice here that ABC Insurance is projected to grow 5%

in each department. You could enhance your model by

having unique growth rates tied to individual lines of

business, versus one rate for the overall growth number.

Section 3Section 3 deducts leakage from the commissions and

fees due to the estimated retention per department. It is

important to note that these retention numbers are based

on retention of revenue, not retention of number of

accounts. In this example, the overall retention of revenue

is 91.6% which equates to $338,250 of leakage.

The section between Section 3 and 4 might be the most

important. It calculates the required amount of new

business your agency will need in order to achieve the

growth percentages you have projected. In this example,

given the $4,015,000 commissions & fees from 2011, this

agency will need $539,000 in new business to offset the

$338,250 in leakage.

Section 4Section 4 is the “validation” part of the budget model.

In this section, each individual producer’s goals are broken

out and validated based on production in several previous

years. Agencies can use whatever number of years they

think provides the best insight into likely new business

production by producer.

At the bottom, the individual producer goals are summed

up to show the shortfall or excess in relation to the amount

of new business required (this is the $539,000 between

sections 3 and 4). In this example, the minimum expected

goals of the producers are $64,500 short of the $539,000

required to grow the desired 5%. But the stretch goal,

which is the “best case” scenario, is $56,000 over the

required $539,000.

As you see in section 4, the minimum expected new business

numbers vary in relation to the previous two years’ production.

For example, despite Producer 7’s impressive $975,000

book size, he’s only put on a total of $38,500 total in the

past two years. So his minimum new business production

goal is $20,000. This is where the sound judgment of

senior agency leaders comes into play. It’s not logical to

expect Producer 7 to put on $100,000 given his last two

years of production (barring any type of life setback which

is assumed not to be the case in this example).

In summary, your agency needs to determine how much

business it needs to sell to achieve its desired growth.

The goal is to begin with a targeted growth number and

then dissect how to get there. Here are some simple steps

to creating the budget validation model:

1. List out each product that is unique to your organization.

You will want to group each product into line items

that have similar revenue streams and product

characteristics. For instance, you will want to separate

life, group benefits and commercial lines. Do not

include any contingency growth in any of the numbers.

2. The next piece is building out how much net growth

you would like to achieve.

3. This step is often missed, but it is crucial to back out

the lost business. Input the product retention rates that

you have you had historically.

4. Now that we have all of the pieces, we can figure out

exactly how much business needs to be put on for the

timeframe used.

5. Validate the required growth numbers by listing each

individual producer’s goals for the upcoming year.

This will help you identify potential revenue shortfalls and

assess additional growth opportunities, such as:

a. Current producer accountability/new business

b. Number of new hires

c. Increased retention

d. Enhanced cross-selling

e. Buying business

If building an annual budget validation model will help

you better financially prepare for the next 2-3 years in

every department, the question shouldn’t be, “Why would

you build a validated budget model?” The better question

is “If high growth agencies are building a budget validation

model annually, why wouldn’t you?!”

Justin Berry, Vice President of Sales Management at MarshBerry and can be reached at Justin.Berry@MarshBerry.com or 440-220-5431. Jim Wochele, Sales Management Analyst at MarshBerry and can be reached at Jim. Wochele@MarshBerry.com or 440-392-6559.

The Budget Validation Model Explained

Executing your business plan is where the rubber meets

the road. An agency that employs a budget validation

model will take into consideration historical new business

production to establish new business goals for each

producer. Then the agency will aggregate the expected

new business of all producers to see how it aligns with

the overall corporate growth goals.

In an effort to align individual sales goals with overall

corporate growth goals, some agencies add teeth to their

plan by requiring minimum new business production

numbers to retain producer status. A recent MarshBerry

survey found that 71.2% of high-growth and 58.4% of

average agencies required minimum new business goals.

By incorporating producer accountability and tracking

systems into the agency, executives and sales managers

have real-time insight into how their producers are tracking

versus goal. This insight helps agency management to

direct the necessary time and resources to help any

producer who is lagging behind goals, and to balance

the overall agency goals with market realities.

Supporting the Execution

FIGURE 3 MarshBerry Survey Results

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