The document discusses the importance of incorporating a validated budget model into an agency's business plan to achieve sustainable growth, emphasizing the need to base projections on historical performance rather than unrealistic goals. It outlines the steps to create a budget validation model that considers past commissions, estimated retention, and new business capabilities of individual producers. The approach is designed to make budgeting more accurate and to align individual producer goals with overall corporate growth objectives.

1. A MarshBerry Publication | Volume XXVIII, Issue 7 JULY 2012
Planning to Plan Your Growth
Most successful agencies utilize a business plan to drive 10% growth goal. It does not take into account retention by
their business activities during the year. And while 86% department, projected growth (or shrinkage) by department or
of high-growth agencies update their business plan every new business per producer to help validate the projected
year, only 59% of average agencies do. Annual budgeting growth by department. In order to reduce the inaccuracies
is the lynchpin of any successful business plan and most in this traditional approach and to create a more robust
agencies build out their budget year-after-year, but budgeting tool, it is imperative to employ a validated budget
surprisingly, many do not. This issue of the MarshBerry model into the process.
Letter will examine the importance of incorporating an
To build a validated budget model requires collaboration
annual budget into your business plan and the value of
among key agency leaders who use their experience and
integrating a budget validation model.
sound judgment to balance expected organic revenue growth
from operations with actual production results from past
FIGURE 1 Our Business Plan (check all that apply) 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
Source: MarshBerry Sales Management Best Practices Database hiring additional producers or by providing sales training
to your current production staff.
Of the agencies that actually do annual budgeting, many The validated budget model serves helps the agency to
do so with a half-hearted approach. One popular approach understand its current organizational capabilities and
entails simply adding 10% to last year’s revenue without any identify the key drivers of historical growth performance.
other considerations. This method is extremely inaccurate But using a process that looks at your historical data and
and rife with risk as there is no validation to support the business model is just the beginning. The model needs
Continued on Page 2
JULY 2012 • theMarshBerryLetter 1

2. Planning to Plan Your Growth Continued from Page 1
to include additional subjective and objective criteria Now that we have established the importance of building a
necessary to achieve sustainable and predictable validated budget model, we will now examine the particulars
organic growth. on how to build one. First, build out the 4 basic components
of the model listed below:
To be successful, agencies need to pinpoint what has
made them successful and repeat those things as much as 1. Previous year’s commissions & fees
possible to help drive more growth. Alternatively, agencies 2. Projected new business numbers for the upcoming year
can examine what has hindered their growth and how to
we address the barriers to robust growth. By understanding 3. Estimated retention by department
which division or product is driving your growth, you can 4. Individual producer new business capabilities
change the business resource allocations appropriately and
The individual producer capabilities comprise the validation
focus more on certain business practices or departments.
part of the model as they will help validate the projected
From the outset, long-term management practices can new business numbers for the upcoming year. See Figure 2
be monitored, changed and tweaked to help the agency below for a sample screen shot of a budget validation
reach its goals. For instance, hiring in the benefits division model. The following section will detail how to construct
can be increased or decreased accordingly to help hit the your own budget validation model.
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.
FIGURE 2 Sample Budget Validation Model
2 JULY 2012 • theMarshBerryLetter 1

3. The Budget Validation Model Explained
Section 1 For example, despite Producer 7’s impressive $975,000
book size, he’s only put on a total of $38,500 total in the
Section 1 is broken out by department and lists the previous past two years. So his minimum new business production
year’s commissions and fees. In this sample model, they only goal is $20,000. This is where the sound judgment of
have commercial, benefits, and personal lines departments. senior agency leaders comes into play. It’s not logical to
As you follow the numbers throughout the model, you expect Producer 7 to put on $100,000 given his last two
will see that all numbers tie to the preceding numbers. years of production (barring any type of life setback which
For example, section 2 adds the projected new business is assumed not to be the case in this example).
based on section 1’s data. And section 3 deducts the
In summary, your agency needs to determine how much
commissions and fees lost due to retention.
business it needs to sell to achieve its desired growth.
The goal is to begin with a targeted growth number and
Section 2 then dissect how to get there. Here are some simple steps
Section 2 is where you input the upcoming year’s new to creating the budget validation model:
business production. Again, this is broken out per department 1. List out each product that is unique to your organization.
so that it is more accurate in the validation process. You’ll You will want to group each product into line items
notice here that ABC Insurance is projected to grow 5% that have similar revenue streams and product
in each department. You could enhance your model by characteristics. For instance, you will want to separate
having unique growth rates tied to individual lines of life, group benefits and commercial lines. Do not
business, versus one rate for the overall growth number. include any contingency growth in any of the numbers.
Section 3 2. The next piece is building out how much net growth
you would like to achieve.
Section 3 deducts leakage from the commissions and 3. This step is often missed, but it is crucial to back out
fees due to the estimated retention per department. It is the lost business. Input the product retention rates that
important to note that these retention numbers are based you have you had historically.
on retention of revenue, not retention of number of
accounts. In this example, the overall retention of revenue 4. Now that we have all of the pieces, we can figure out
is 91.6% which equates to $338,250 of leakage. exactly how much business needs to be put on for the
timeframe used.
The section between Section 3 and 4 might be the most
important. It calculates the required amount of new 5. Validate the required growth numbers by listing each
business your agency will need in order to achieve the individual producer’s goals for the upcoming year.
growth percentages you have projected. In this example,
This will help you identify potential revenue shortfalls and
given the $4,015,000 commissions & fees from 2011, this
assess additional growth opportunities, such as:
agency will need $539,000 in new business to offset the
$338,250 in leakage. a. Current producer accountability/new business
b. Number of new hires
Section 4 c. Increased retention
Section 4 is the “validation” part of the budget model. d. Enhanced cross-selling
In this section, each individual producer’s goals are broken
e. Buying business
out and validated based on production in several previous
years. Agencies can use whatever number of years they If building an annual budget validation model will help
think provides the best insight into likely new business you better financially prepare for the next 2-3 years in
production by producer. every department, the question shouldn’t be, “Why would
you build a validated budget model?” The better question
At the bottom, the individual producer goals are summed
is “If high growth agencies are building a budget validation
up to show the shortfall or excess in relation to the amount
model annually, why wouldn’t you?!”
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 Justin Berry, Vice President of Sales Management at MarshBerry
required to grow the desired 5%. But the stretch goal, and can be reached at Justin.Berry@MarshBerry.com or 440-220-5431.
which is the “best case” scenario, is $56,000 over the Jim Wochele, Sales Management Analyst at MarshBerry and can be
required $539,000. reached at Jim. Wochele@MarshBerry.com or 440-392-6559.
As you see in section 4, the minimum expected new business
numbers vary in relation to the previous two years’ production.
JULY 2012 • theMarshBerryLetter 3

4. Supporting the FIGURE 3 MarshBerry Survey Results
Execution
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.
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