“Good fortune is what happens when opportunity meets planning.”
– Thomas Edison
As the new year approaches, it’s time for independent agencies to tackle one of their most important—and sometimes most exhaustive—tasks: budgeting. Whether you’re focused on maintaining day-to-day operations or planning for growth, a well-thought-out budget can make all the difference. One common question often arises: Should you include contingencies in your budget? Here’s our take on this essential topic, along with some tips to guide your decision-making process.
Budgeting itself is non-negotiable. It’s a critical tool for planning everything from carrier partner relationships to internal agency operations. While there’s no definitive answer on whether to count contingencies, there are key factors to consider.
Contingencies, such as quarterly guarantees, can provide predictable and reliable support if they’ve been historically consistent. In contrast, profit sharing often depends on variables like loss ratios and carrier performance, making it less predictable. If your agency has dependable quarterly guarantees not tied to profit sharing, you might consider including them in your budget. However, profit sharing and other variable contingencies are best treated as a “bonus” rather than a guarantee. This approach ensures flexibility and keeps your budget stable even if these funds don’t materialize.
No matter your approach to contingencies, your historical data is your best friend. Take a look at where your agency has been over the last three to five years. Ideally, you’ll see a pattern of growth—and you can use that to guide your expectations for the upcoming year. If you’ve doubled your premium, for instance, it might be reasonable to double your expected profit sharing. (Pro Tip: Be sure to look at percentages rather than dollar amounts for a more accurate picture.)
Another important factor is your current loss ratio. Where does it stand as you head into the new year? Some carriers close their books before January 1, meaning losses reported late in December may not count against this year’s profit-sharing calculations. However, it’s always safer to plan conservatively. A close estimate is better than banking on profits that may not materialize.
It’s helpful to separate your budget into two categories: one for day-to-day operations and one for growth initiatives. Day-to-day budgets cover the essentials—rent, utilities, salaries—while growth budgets focus on opportunities to expand your agency’s reach. Contingencies and profit sharing can be particularly helpful in funding growth projects, but only if you’ve got a reliable track record to base them on. If there’s uncertainty, it’s better to leave these funds out of your core operational budget to avoid over-reliance.
All in all, the choice of whether to budget with contingencies is yours. The most important takeaway: We believe Creating a thoughtful budget is essential for success. By using your agency’s historical data, planning for growth, and aligning decisions with your goals, you can approach the new year with confidence. Whether or not you include contingencies, a well-prepared budget provides a solid foundation for the year ahead.