Page 198 - The UnCaptive Agent

EARLY DAYS OPERATIONS: CHASE THE VISION, NOT THE MONEY 171

determined as cash plus premiums receivable
divided by premiums payable.

2. Current Ratio: This ratio shows the agen-
cy’s ability to pay its bills on time by dividing
current assets by current liabilities. To ensure
solvency and ability to pay on time, this ratio
should be 1.25 or better.
3. Number of Days of Working Capital Ratio:
This ratio measures your agency’s ability to con-
tinue to pay daily expenses from current work-
ing capital. Working capital is defined as current
assets minus current liabilities. This ratio is
calculated as current assets minus current liabil-
ities divided by total agency expense divided by
three hundred sixty-five. Ideally, the number of
days would be equal to sixty or more. Every day
below that number means you are that much
closer to insolvency. If the ratio falls below
forty-five days, you should be working very hard
to collect receivables, cut expenses, or find a way
to finance a cash flow gap.

4. Customer Retention Ratio: This is calculated
by taking the annualized number of accounts
renewed and dividing by the number of annu-
alized accounts that came up for renewal.
You should target ninety percent retention or
better. Think of retention this way—if you are
growing ten percent per year in new accounts
and your retention rate is ninety percent, you
are going nowhere. New business acquisition
has to be greater than the accounts lost to grow
your business. Thus, the higher your retention
rate is, the higher your growth rate will be.