Financial freedom is a huge incentive for entrepreneurs to open their own insurance agencies. Everyone has seen the trope about rich insurance agency owners relaxing on the beach while their businesses generate millions in revenue.
Unfortunately, we’ve also all heard the stories of agents running their companies paycheck to paycheck, trying to stay profitable enough to keep the doors open. This often happens even to the most tireless, hardworking agents.
So, what’s the difference?
What separates wildly successful agents from those struggling to get by?
Sometimes it comes down to circumstances like your local region or your customer demographics. But agents often blame these circumstances entirely when a simple accounting switch could help turn things around.
We’re talking about the “Profit First” approach, popularized by author Mike Michalowicz. We hosted an excellent webinar with him discussing this strategy, and another with Donna Lim, a speaker on Mike’s team who focuses specifically on helping insurance agents succeed.
Below is a quick and dirty guide to using Profit First in your agency to widen your margins — or to make next month the first of your agency operating in the green.
Mike Michalowicz is no stranger to financial hardship. His wakeup call came in 2008 when he was faced with the choice to either declare bankruptcy or go to jail for not being able to pay his taxes. His nine-year-old daughter brought out her piggy bank and offered to help with bills. “That was the darkest moment of my life,” Mike says.
So if your agency is in trouble right now, Mike knows exactly how you’re feeling.
What Mike considers his biggest failure led him to ask a very important question that would eventually change the course of his financial life: Why, despite all his early business success, were the businesses he invested in not profitable?
The answer unexpectedly came from a 3 A.M. insomnia-prompted TV binge. An infomercial fitness expert gave the advice to work alongside your natural human behaviors, not fight against them.
In an instant, Mike understood.
You’ve probably seen this formula before:
Sales revenue – expenses = profit
In other words, you subtract your business expenses from the money you bring in, and anything left over is your profit.
But according to Mike, that sets your brain up to assume that profit is the least valuable part of the equation. It’s just the leftovers.
“What about your family?” Mike asks. “If you love your family, do you say, ‘I love my family so much. That’s why I always put them last’? Of course not. You say, ‘I love my family so much. That’s why I always put them first.’”
Mike swapped the variables in the formula in a way he believes works alongside natural human behaviors:
Sales revenue – profit = expenses
This switch doesn’t look like much on the surface, but Mike insists it makes a huge difference on a psychological level.
Here’s why:
|
Instead of treating profit as an afterthought, you put it first in your mind. You take your sales revenue, subtract the profit you need to make, and anything left over after that is the budget you have for expenses. |
This model is akin to the “pay yourself first” principle in business finance.
By intentionally constraining the supply of money you have available for expenses, you’re forced into a frugal mindset where you only spend what you absolutely need to spend. Everything after what you take out as profit is your budget for operational expenses — non-negotiable.
“When you take your profit first, you guarantee your profit,” Mike says emphatically.
The Profit First solution is based on a variation of Parkinson’s Law: Demand for a resource increases as its supply increases.
He draws an interesting parallel to illustrate the point. Humans have historically always filled up their dinner plates with food and eaten it all. The difference is, 300 years ago a dinner plate was about the size of a coffee saucer today. As our plates have grown, so have our portion sizes.
Human behavior has not changed. The resource (the size of the dinner plate) changed, and the demand for that resource (how much food we try to cram onto a plate) increased proportionately.
The 3 A.M. infomercial fitness instructor solved the problem with one sentence: “Just get smaller plates!”
That’s when the solution to his financial woes clicked into focus for Mike: His business account “plate” was too large, and the expenses had expanded to fill it until there was no room left for profit.
By restricting the size of your expenses account, you’ll be forced to make smarter spending decisions. That’s why taking profit out first is such a powerful way to trim excess spending and guarantee a positive balance at the end of the month.
When Donna Lim first read Mike's Profit First book, she wasn’t a fan.
“This book kept circling around and I would read it, and reread it, and to be fully transparent here, I hated this book. I absolutely hated it.”
Her pushback was logical for anyone who has ever struggled to stay within a strict budget: You can constrain your expenses on paper, but that’s not going to help you actually live comfortably within that budget.
“But this book surfaced again in 2021 or 2022,” Donna continues. “I thought, okay, it’s not going away anytime soon. I need to try this out on myself before I take this to any clients.”
She set out to do the 1% challenge that Mike discusses in his book. The 1% challenge is as follows:
|
It took Donna nine months to decide that this approach was actually working. She had inched her way up to 12% and her opinion of Mike’s approach had totally changed. |
“I had just two accounts, OpEx and Savings. But what happened was there became a lot of money in that savings account. I had never seen so much money in my business just sitting there. And I started to have all these dreams about what I could do with this money. I could hire an operations manager and maybe not work so much. I could take my team on a 20th anniversary trip. I could redo this office. I could do some more marketing. Oh my goodness!”
The results were undeniable. Putting even tiny bits of profit away as a first priority had caused a cascade of positive effects in Donna’s business and her mentality.
But there was still a problem.
When you get to a point when you’re not hemorrhaging money and you’re able to see some cash accumulate, you’re going to have the temptation to use it. It’s the “dinner plate” problem all over again, only this time, your plate is much bigger.
Mike says, “Have you noticed your expenses almost uncannily keep going up with your income at the exact same rate? You think, ‘Oh, I finally arrived. We got that big job. We're there.’ And then next week it's like, ‘Where'd all the money go? How did this happen? What's wrong?’ Nothing's wrong. It's our natural wiring. It's Parkinson's law: More supply, more ways to spend it, more opportunities to spend it. So, we need to control the supply.”
Donna learned this lesson firsthand.
“Really, I didn’t have money to spend,” Donna says. “It was payroll money. It was dues. It was subscription money. It was marketing money. I could start to see why Mike recommends moving money into smaller accounts for different purposes.”
The Profit First system uses five different bank accounts to keep all your financial needs separate and “control the supply” of cash you can spend:
Separating your cash out in this manner not only removes your temptation to spend excess money, it also ensures you have enough to cover expenses without “stealing from yourself” by switching funds around to cover shortfalls. If this is something you struggle with, Mike recommends opening your accounts at separate banks, so you don’t see the potential pool of usable money when you’re paying for expenses.
If your profit bucket is “out of sight, out of mind,” you’re going to have to make some hard decisions to stay inside your budget. Donna found $10,000 in her first quarter that she could eliminate. This move was part of what shifted her “from four-digit profit to six-digit profit.”
One of Donna’s clients was a captive agent of three years who started with a $40,000 marketing budget, $350,000 in top-line revenue, and losses for each of the three consecutive years they’d been in business.
This client started allocating income in buckets according to the Profit First plan: 1% to Profit, 10% to Owner’s Comp, 10% to Tax, 4% for a debt recovery plan, and the rest for OpEx. Donna says, “After twelve months, the client eliminated their debt, began paying themself twice a month regularly, and now works fifty hours a week instead of sixty or seventy.”
In other words, Mike, Donna, and this client all learned how to fill their Profit dinner plates first and kept the coffee saucers reserved for OpEx.
It’s hard to shave profit off the top of your income when you aren’t making enough to keep your agency above water. Even if your income is sizable already, it’s a whole lot easier to set aside profits with a greater supply of cash in your account.
Either way, EverQuote is here to help. We take the busywork of tracking down qualified leads off your plate, so you can focus on dialing or answering the phone and making sales.
Fill your pipeline with high-intent leads today. Contact EverQuote here to get started.