Chapter 9 - Brokerage Financial Management

Question 1

Profit Maximization

Answer 1

The more profit the better

Question 2

2 methods to determining price of a brokerage

Answer 2

1. Multiple of commissions.

2. Multiple of earnings.

Question 3

What items are on a balance sheet?

Answer 3

1. Assets.
2. Liabilities.
3. Shareholder’s Equity.

Question 4

Assets

Answer 4

1. Cash/Short-term investments.
   - quickly liquidated
2. Accounts receivable.
3. Other Assets.
   - building, technology, location.

Question 5

3 components of revenue.

Answer 5

1. Commissions.
2. Investment income.
3. Other income.

Question 6

5 financial factors to consider in valuing a brokerage.

Answer 6

1. Balance sheet items.
2. Income statement items.
3. Cash flow.
4. Billings.
5. Tax impact.

Question 7

4 production variables used in calculating commission.

Answer 7

1. Retention
2. Changing rates.
3. Up-selling and cross-selling.
4. New clients obtained.

Question 8

4 areas where procedures must be implemented for income management.

Answer 8

1. Trust fund regulations.
2. Commission reserve accounts.
3. Internal cash controls.
4. Accounts receivable.

Question 9

2 parts of insurance premium

Answer 9

1. Premium.

2. Commission.

Question 10

2 control devices designed to protect against ‘white collar crime’

Answer 10

1. Personnel Selection

2. Accounting controls.

Question 11

5 factors that contribute to the cost of accounts receivable.

Answer 11

1. Surrendered opportunity cost of funds.
2. Increased cost of collection activities.
3. Cost of borrowing.
4. Reduced bad debt expense.
5. Commission losses from failure to extend credit.

Question 12

4 topics an accounts receivable policy might contain.

Answer 12

1. Payment Arrangements.
2. Credit Checks.
3. Payment Methods.
4. Responsibility for Follow-Up.

Question 13

6 ways to finance premiums.

Answer 13

1. Brokerage Financing.
2. Financial Institution Financing.
3. Insurance Company Financing.
4. Premium Finance Companies.
5. Captive Finance Companies.
6. Cash Only Financing.

Question 14

Expense Management: 4 means of controlling expenses.

Answer 14

1. Communicating.
   - communicated to all employees effectively.
2. Identifying Areas for Cost Control.
   - employ technology
   - change to direct billing
3. Classifying Costs.
   - cost accounting
   - matching expenses to products and departments.
4. Analyzing Expenses.
   - developing expense standards
   - compare

Question 15

How to accomplish indirect income maximization.

Answer 15

1. Employee Incentive Plans.

2. Lease Arrangements.

Question 16

5 common employee incentive plans

Answer 16

1. Bonus Plans.
2. Stock Option Plans.
3. Performance Plans.
   - profit sharing -stock purchase
4. Deferred Compensation.
5. Pension Plans.

Question 17

3 tests of financial condition.

Answer 17

1. Acid Test.
2. Equity-to-Debt Test.
3. Working Capital Defence Interval.

Question 18

Acid test

Answer 18

Shows how quickly you can liquidate assets to cover your liabilities.

current liabilities.

Question 19

Equity-to-debt test

Answer 19

How much you owe compared to how much you own.

total assets

Question 20

Working capital defense interval

Answer 20

• current assets minus current liabilities.
• shows how long current working capital will cover daily expenses.

working capital

avg. daily expense

Question 21

Lapse ratios

Answer 21

Measures retention.

commission volume of renewals

Question 22

Cost per account ratio

Answer 22

Office (or Sales) cost per account.

# of accounts

Question 23

Expense ratio

Answer 23

• Most meaningful efficiency measure.
• Commission income received less expenses incurred during production of that income.

Commission income

Question 24

Financial information includes:

Answer 24

• balance sheet items
• income statement items
• other financial items

Question 25

What is included in a balance sheet?

Answer 25

• Assets
• Liabilities
• Shareholder’s equity

Question 26

Income statement items

Answer 26

1. Revenue.
   - commissions - investment income -other income.
2. Expenses.

Question 27

Components of financial management cycle

Answer 27

1. Budgeting
   - revenue -expenses
2. Classifying Financial Information
   - segmenting income and expenses by type and source.
3. Making Comparisons
   - once standard adopted, compare to determine level of effectiveness.

Question 28

Factors that contribute to the cost of accounts receivable

Answer 28

• 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

Question 29

An accounts receivable policy might contain…

Answer 29

• payment arrangements
• credit checks
• payment methods
• responsibility for follow-up

Question 30

What is shareholder’s equity?

Answer 30

total assets minus total liabilities