Chapter 9 - Brokerage Financial Management Flashcards
Profit Maximization
The more profit the better
2 methods to determining price of a brokerage
- Multiple of commissions.
2. Multiple of earnings.
What items are on a balance sheet?
- Assets.
- Liabilities.
- Shareholder’s Equity.
Assets
- Cash/Short-term investments.
- quickly liquidated - Accounts receivable.
- Other Assets.
- building, technology, location.
3 components of revenue.
- Commissions.
- Investment income.
- Other income.
5 financial factors to consider in valuing a brokerage.
- Balance sheet items.
- Income statement items.
- Cash flow.
- Billings.
- Tax impact.
4 production variables used in calculating commission.
- Retention
- Changing rates.
- Up-selling and cross-selling.
- New clients obtained.
4 areas where procedures must be implemented for income management.
- Trust fund regulations.
- Commission reserve accounts.
- Internal cash controls.
- Accounts receivable.
2 parts of insurance premium
- Premium.
2. Commission.
2 control devices designed to protect against ‘white collar crime’
- Personnel Selection
2. Accounting controls.
5 factors that contribute to the cost of accounts receivable.
- Surrendered opportunity cost of funds.
- Increased cost of collection activities.
- Cost of borrowing.
- Reduced bad debt expense.
- Commission losses from failure to extend credit.
4 topics an accounts receivable policy might contain.
- Payment Arrangements.
- Credit Checks.
- Payment Methods.
- Responsibility for Follow-Up.
6 ways to finance premiums.
- Brokerage Financing.
- Financial Institution Financing.
- Insurance Company Financing.
- Premium Finance Companies.
- Captive Finance Companies.
- Cash Only Financing.
Expense Management: 4 means of controlling expenses.
- Communicating.
- communicated to all employees effectively. - Identifying Areas for Cost Control.
- employ technology
- change to direct billing - Classifying Costs.
- cost accounting
- matching expenses to products and departments. - Analyzing Expenses.
- developing expense standards
- compare
How to accomplish indirect income maximization.
- Employee Incentive Plans.
2. Lease Arrangements.
5 common employee incentive plans
- Bonus Plans.
- Stock Option Plans.
- Performance Plans.
- profit sharing -stock purchase - Deferred Compensation.
- Pension Plans.
3 tests of financial condition.
- Acid Test.
- Equity-to-Debt Test.
- Working Capital Defence Interval.
Acid test
Shows how quickly you can liquidate assets to cover your liabilities.
current liabilities.
Equity-to-debt test
How much you owe compared to how much you own.
total assets
Working capital defense interval
- current assets minus current liabilities.
- shows how long current working capital will cover daily expenses.
working capital
avg. daily expense
Lapse ratios
Measures retention.
commission volume of renewals
Cost per account ratio
Office (or Sales) cost per account.
# of accounts
Expense ratio
- Most meaningful efficiency measure.
- Commission income received less expenses incurred during production of that income.
Commission income
Financial information includes:
- balance sheet items
- income statement items
- other financial items
What is included in a balance sheet?
- Assets
- Liabilities
- Shareholder’s equity
Income statement items
- Revenue.
- commissions - investment income -other income. - Expenses.
Components of financial management cycle
- Budgeting
- revenue -expenses - Classifying Financial Information
- segmenting income and expenses by type and source. - Making Comparisons
- once standard adopted, compare to determine level of effectiveness.
Factors that contribute to the cost of accounts receivable
- Interest that could have been earned on funds tied up.
- Higher collection costs
- Cost of borrowing
- Bad debt expenses
- Losing clients for not extending credit
An accounts receivable policy might contain…
- payment arrangements
- credit checks
- payment methods
- responsibility for follow-up
What is shareholder’s equity?
total assets minus total liabilities
