You’re a small to medium business owner and as such, you are a risk taker whether you accept that or not. You have foregone a stable employment income for life as an entrepreneur. You experience all the advantages of self direction and being your own boss but with the headaches of unstable income flow and business risk.
According to a credit reference checking agency, Veda Advantage, over 90% of businesses survive their first year but less than 45% last 9 years or more.
Risk is a small word, but it comes in many forms for a business owner to deal with. So how can you manage risk?
The first step is to identify the specific risks that could affect your business, and then you can formulate a plan to mitigate those risks. Just ignoring risks by not looking for them is no solution!
Categories of Risk
- Risks posed by customers (Are you dependent on one large customer?)
- Risks posed by suppliers (Late delivery: no product = no profit!)
- Risks posed by staff (High turnover = disruption, and losing key people = lost expertise)
- Risks posed by the business premises location (prone to flood, access to transport routes)
- Threats to goodwill and reputation (product recall, fraud)
- Risks posed by information technology (server, email, website)
- Risks posed by financial transactions (fraud, bad debts, exchange rates)
- Risks posed by competitors (patents, trends, and communication with clients)
- Risks posed by the market or the economy
- Unexpected exit of the business owner (key person, succession planning)
For more detail on these categories of risk and how to manage them, download a handy guide from CPA Australia here. In most cases the solution is a mixture of risk mitigation, risk control and risk transfer through insurance.
Everyone hates paying for insurance, especially small business people (there’s that risk taker streak inherent in your personality again). Here are my top tips to implement now to reduce the cost of insurance premiums.
1. Mitigate the risk within your business to avoid having to claim.
Put in place a Risk Management Plan with measures like:
- proper OH & S policies for employee and client safety,
- credit policies to avoid bad debts or a poor credit record,
- service standards to ensure consistent customer service,
- diversifying your client base to avoid reliance on one large client, and
- IT security to protect data and hardware.
If you can mitigate exposure to risk, resulting in fewer claims, you will make your business attractive to insurers and receive lower premiums.
2. Choose excesses that suit the risk and that you can manage.
The higher the deductible, the lower the premium. If you have put risk management measures in place, then you may be more confident to take on some of the risk yourself by only insuring for major risk events through choosing higher deductibles. Make sure your cash flow can handle the smaller events.
3. Make sure your property values and policy limits are accurate and realistic.
Get a professional appraisal of your property values. Accurate values and limits mean you are adequately covered, and ensure that you aren’t paying excessive premiums. Don’t let CPI indexing of values creep up on you in a stagnant property market.
4. Review your policy cover regularly.
Work with your insurance broker to make sure you have all the covers you need without paying for bells and whistles you don’t want. They are being paid for the renewal, so make them earn their fees. Most businesses do not fully utilise the services of their broker or their financial planner.
You don’t want to miss a renewal, and you don’t want them all at the one time. I try and group the different covers so they are spaced quarterly throughout the year. I plan just enough time between them so I am not swamped with paperwork and therefore am prepared to review each cover.
5. Be proactive, and just ask!
Ask your insurer what you can do to lower your premium. Things like installing an alarm or sprinklers could reduce your premium, and systems have got a lot cheaper in recent years. Also, it’s your money so ask for a discount on your premium. The worst they can say is no, and that may make you more determined to seek an alternative at the next renewal!
If you have any other ideas for managing risk then please comment and share with others as we can all benefit from each other’s experiences, good or bad.
Liam Shorte BBS (Hons) AFP SSA
Liam is a Founder of Eviser , SMSF Expert and Principal at Verante Financial Planning as well as the NSW Chair of the SMSF Association. He is always looking to develop good connections for the benefit of my clients and those who choose to refer their clients to him