Small companies lack the cash cushion or access to funds that bigger businesses might enjoy. Many small businesses were devastated by the coronavirus pandemic. Even with programs such as the Paycheck Protection Program, many did not survive. But for lots of small businesses that did survive the past few years, and for those emerging since then, the pandemic economic disaster seems to be behind us — but new challenges are forming in the economic landscape — as always.
Economic conditions are always a moving target — often a frustrating mixture of both stagnant and turbulent obstacles and opportunities, all at the same time. The only constant is change, and even the changes are always changing. If the state of change in any area (whether big or small) can be somewhat predicted, economists call it risk. Risk implies that some odds or percentage of likelihood can be calculated and forecast. Everything else is just called uncertainty.
Whether you can place odds on any particular potential event in the business environment, risks and uncertainties are inevitable. Bad stuff will happen. And such events come in all sizes: an annoying hiccup, a costly roadblock, or a huge catastrophe. A continuous requirement for business success is to expect the inevitability of bad stuff, and to make plans and strategies for adapting and bouncing back, while faced with the general dilemma of limited financial resources. There is never enough money to do all the things wanted or needed. This has been a universal reality since business and economics became foundations of what we call civilization.
This is why insurance was invented.
Insurance is not for the bad stuff we can afford — the hiccups, speed bumps, and not-too-costly roadblocks. Insurance is for the bad stuff we can’t afford — the costlier roadblocks, the disasters, and especially the catastrophes. Insurance premiums are a thin slice of what each participant can afford, paid-in in relatively small doses to form a big pool of money that can get doled out to those participants when needed — to cover some or most of the costs of certain predicted bad events that individually no participant can afford.
You may be thinking, “Duh! Everybody knows that!” But not everybody does — everybody should.
If you run a business that survived the pandemic, or have recently started a newer business that is a rising star or a struggling fledgling (and aren’t these often the same thing?), you really should take a hard, serious look into your business insurance coverage. Business insurance can cover a wide variety of issues — including property damage, many kinds of liabilities, lawsuits, loss of key employees, and loss of business income.
If it has been a while since you last reviewed your business’s insurance coverage, now is a really good time to conduct an in-depth review of your policies. A review can help detect shortcomings in coverage and help you protect your livelihood from financial harm.
What’s the “Right” Amount of Coverage?
If you run a brick-and-mortar business, it’s likely that you have commercial property insurance and general liability coverage as well as additional policies. Even with a home-based or WFH side-gig, you should still carry liability coverage for things like:
- Injury hazards if you have clients or patients come to your home office
- Errors and omissions if you do technical/professional knowledge work
- Possible damages to other people’s property if you go out on sales calls, or to meet clients at their homes or offices, or even to conduct business in a coffee shop (lawyers like to sue the greatest potential source of money, so your business is at risk if you spill hot coffee on a client or sales prospect in the course of conducting business!)
- Auto insurance for all company-owned vehicles, and if you use your personal vehicle for business purposes make sure your business is named as additionally insured in a rider on your personal auto insurance.
It may be that things have changed in your business since you last reviewed your policies — new locations, updated equipment, or other changes. The right amount of coverage should reflect the current status of your business.
You may also want to consider reviewing your deductibles. Raising deductible amounts to reduce policy premiums is considered a fiscally sound strategy — but only up to a point. Remember: insurance is to cover the things you can’t afford, not the things you can. The bottom line is that if you cannot afford to pay the deductible, it is too high. Pay slightly more in premiums to spread that unaffordable risk across easier terms. Monthly installment premiums also cost a little extra than annual, but are much easier to manage in terms of cash flow.
Look for Gaps in Your Coverage
Review your policies thoroughly before you renew them. In particular, look for new exclusions, as these can potentially expose your business to risks you assumed were covered. The review period is also a good time to dig deep into the financial soundness of your insurance carriers. Various insurance ratings agencies — such as A.M. Best, Moody’s Investors Service, Standard and Poor’s, and Fitch Ratings — measure the financial health of insurance companies and their ability to pay policyholders’ claims. Each ratings agency employs its own ratings system, though generally similar to letter grades used in education.
Take the time to look into new areas of potential vulnerability that could harm your business. For example, what if there is a resurgence of COVID resulting in more lockdowns and closures? Or what if a different other pandemic hits? Business income insurance may help cover your costs until your business is up and running again, helping you to continue to pay expenses, such as payroll and monthly bills, until the next crisis has passed. But you’ll want to make sure that crises such as a pandemic are covered, and the specific terms of coverage.
Insure Your Most Valuable Resources
Who is essential to your business’s success? Most likely, it’s you, your partner, or your most productive salesperson. Think what might happen if you or that person dies unexpectedly. Your revenues could fall, your operations could be disrupted, and the future of your company could be in danger. A key person life insurance policy can provide the funds to carry on with operations as usual.
With key person life insurance, the business buys the policy, pays the premiums, and is the beneficiary. If the insured key person dies, the proceeds from the policy would help your business make up for lost sales and interrupted cash flow. The proceeds also could help hire and train a replacement or permit the business to continue on with any business or expansion plans.
It can be time consuming and, frankly, just a total pain to conduct a thorough insurance review. But as recent history really hammers home, bad things can come out of nowhere and devastate your business. That’s why it makes sense for you to work closely with your financial professional to see if your business’s insurance coverage continues to meet your needs.
Many industries and professions have standard expense ranges of what’s reasonable and smart for categories and levels of insurance coverages. Baum CPA can help you with preparing and analyzing your business financial statements — and help you learn more about insurance expense/benefit ratios. Your first consultation with Baum CPA is free! Just click here to make an appointment.
This blog and its authors provide this content strictly for informational purposes. No content herein should be misconstrued as financial advice. Everyone’s specific circumstances vary — Always consult with a qualified, licensed financial advisor, legal counsel, and tax professional before venturing into any investment or business activities.