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NOT OUT OF THE WOODS, YET

Posted by Phil Trem on May 11, 2020

Stress Testing Your Business

About now, you may be thinking: “The worst must surely be behind us.” True, there is some thought that unemployment claims have peaked and with many states initiating their re-opening plans, there are a lot of reasons to be optimistic that we are over the hump.  But the reality is, although we know a lot more than we did 60 days ago, we aren’t out of the woods yet.  This is especially true when it comes to the potential financial impact of the COVID-19 pandemic on your company’s financial performance.

Here’s a likely familiar scenario for many of our readers: your firm binds coverage on a new account and moments later, you hear the producer knocking on your door asking when they are going to have their commission paid.  You probably tell this producer it will take 30 to 60 to 90 days before the agency is even paid its commission. Now think about this equation in reverse. If you have clients that are struggling now to pay their premiums and are asking for grace periods from carriers, or you have clients that recently laid off staff or might not recover and have to shut their doors, this likely won’t appear in your revenue stream for another 30, 60 or 90 days.

Below is a table detailing consumer spending vs. the prior year and the prior month in a number of categories.

When you look at the data above, are you drawing any connections to your client base? Have you gone through and identified which accounts within your book of business might be at higher risk of struggling? One approach is to segment your clients by anticipated revenue impact. Red Group (revenue down more than 15%), Yellow Group (revenue range down 15% to flat), and Green Group (revenue flat to up)? Take a look at the table above again for some insight into which consumer category might align with each of your clients, then assign the client to a group. Are you drawing any connections to your client base? Are you more heavily concentrated in red clients? Are you deep in the woods or on the edge?

Beyond looking at each account, have you taken the build-up of that worst-case scenario and stress tested your business? How low can your monthly cash flow get before you need to reduce headcount or tap additional capital (either funds you already had in reserve or from the Payment Protection Plan or new liquidity from the capital markets). Working backwards from that number, how does that relate to the account analysis you’ve done? Do they line up? We are hearing from brokers across the country that many are using a 10% reduction in revenues in order to understand what changes would need to be made in that scenario.

We assume most businesses have taken some proactive cash conservation steps like reducing discretionary spending and have already harvested the low hanging fruit in their P&Ls. So how will you know if or when it’s time to make other, likely more difficult, business decisions? Odds are that the cash crunch for most brokers is still in front of them, and the time to get prepared is now.

If you have questions about Today’s ViewPoint, or would like to learn more about understanding the value of your firm, please email or call Phil Trem, President - Financial Advisory at 440.392.6547.

As we keep our eye firmly focused on the industry and actions within it, we are eager to know what you are experiencing. Take a quick 3-minute MarshBerry Pulse survey to help us gauge the industry’s response and outlook as the country moves towards “open for business” from the anticipated loosening of stay-at-home orders.

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Topics: Financial Advisory, insurance, economy, brokers, sba, value, agencies, consumer spending, high risk

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