Revenue is vanity, profit is sanity
There are many protection businesses that measure their clawback incorrectly.
They calculate their clawback percentage simply on the basis of whatever cancels against the policies they have placed on risk in any given month.
THIS IS A BIG MISTAKE
Cashflow and profit are entirely different things.
Positive cashflow in any month should NOT be taken to mean that your business is in a healthy position.
The failure to properly account for future clawbacks could build up a future liability, one that you simply won’t be able to afford.
How are you calculating your profit?
You must measure your profit by associating the clawback to the month that the business was placed on risk, NOT the month the clawback occurred.
Look at this fictitious example of a small distributor below, spending £20,000 in leads and selling £30,000 in commission for January 2018.
I acknowledge that in reality it may take 4 weeks for the commission income to come in, but I’ve simplified that to make it easier to explain.
Instead of accounting for the clawback in the month it occurs, it should be associated to the month the business was placed on risk.
At first, the “apparent” profit for the business looks good. It looks as if the business is making an adequate profit. And at this stage, the cashflow in the business appears strong.
But see what happens once the clawback for a month is associated to the month that it was placed on risk. The “real” profit is actually very different.
Over time, the business will accrue a negative liability, which could be almost impossible to mitigate; that will entail a race to make the sales that can help pay for prior clawbacks.
TOP TIP: You should be tracking clawback in this way across every KPI in your business, including marketing source and sales person.
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