Caib 4 Chapter 9

Front 1

Define PROFIT MAXIMIZATION

Back 1

Brokerages strive to build profits, therefore the more profit the better.

Front 2

What are leading the causes that distract from profit maximization?

Back 2

Brokerages are often distracted from implementing strategies to maximize profits because of the day to day practicalities of running brokerages. The primary distracters fulfilling clients needs; info requests; and insurer obligations.

Front 3

Explain how the Multiple of commissions method works and identify a shortcoming when using this evaluation method.

Back 3

Valuing brokerages using multiple of commission method bases value on annual commission income multiplied by a certain number.

One major shortcoming of this valuation method is that profitability of brokerage is not considered.

Front 4

Explain how items in balance sheets will affect brokerage value

Back 4

Assets: Cash, accounts receivable, and other assets will influence value when these pass from seller to buyer.

Liabilities: Current and long term liabilities will influence value when these pass from seller to buyer.

Shareholders Equity: As all assets and liabilities have already been considered, shareholder's equity will not influence the brokerage.

Front 5

Two main items on Income Statements

Back 5

1. Revenues

2. Expenses

Front 6

Indicate how cash flow projections affect brokerage value.

Back 6

To ensure adequate funds are available during transition periods the more available cash the better. AR Will be a strong indicator of pending cash flow. Attention must be paid to aged receivables over 60 days as they may result in bad debts and not contribute to cash flow.

Front 7

Describe how billings may affect brokerage value

Back 7

As the cost to bill an account is the same, regardless of size of the account, the fewer the billings the better.

Front 8

Explain how business mix may affect brokerage value.

Back 8

when purchases are considering brokerages to purchase they will desire brokerages with business mix that is appealing to them.

There is no perfect mix, buyers preference will prevail.

Front 9

Indicate how loss ratio may affect brokerage value

Back 9

It indicates the strength of it's relations with insurers and affects the contingent profit payments from insurers.

Front 10

8 Factors affecting brokerage values

Back 10

1) Geographic Representation - sometimes brokerages in geographic areas will command a higher price.

2) Companies Represented - Brokerage with contracts with insurers- important to purchase may have an enhanced value.

3) Type of billings - Purchasers that have strong direct billing type business will be more interested in brokerages that have a significant amount of person lines direct billed.

4) Relationships with Clients - Strong retention rates and solid client relationships will have enhanced value.

5) Quality of employees - well trained, professional and well compensated staff will enhance value.

6) New Business Potential - Opportunities for growth within existing clients.

7) E&O Claims - History of E&O losses will indicate problems within operations and influence value.

8) Loss Ratio - affects size of contingent profits and relations with insurers.

Overall, buyers perception of the potential profit of a business is the true value of the brokerage.

Front 11

Identify 3 Components of financial management cycle.

Back 11

1) Budgeting - Revenue/Income, expenses

2) Classifying Financial Information - Where the income and expenses come from

3) Making comparisons - comparisons made to determine level of effectiveness.

Front 12

Identify budget considerations that must be considered by brokerages when developing their budgets.

Back 12

Brokerages must consider: commission income which includes retention; changing insurance rates; up-selling and cross selling; new clients obtained. Other revenue items to be considered are investment income and other income sources.

Front 13

Why must financial information contained in budgets be classified?

Back 13

Classifying financial information allows brokerages a consistent basis from which to develop comparisons.

Front 14

Financial Management should be proactive not reactive. Explain?

Back 14

Constant measurement of performance will identify positive variances to be maintained and negative variances to be corrected. Simply recognizing variances is not enough. Strong managers recognize corrective actions throughout the year is a proactive response to comparisons.

Front 15

Four areas that must be examined by management prior to establishing proper procedures for handling brokerage funds

Back 15

1) Trust Fund Regulations

2) Commission reserve accounts

3) Internal cash audits

4) AR