With experts predicting slower than expected economic growth in 2016, the challenges of running a small business increase. As financial pressures continue to rise, many businesses are looking at ways to cut their spending in order to survive.
Insurance, according to research by the Insurance Council of Australia, is often the first expense in line for a trim. One recent report estimated that 37% of SMEs do not have adequate insurance cover and only 40% of insured businesses (PDF, 539KB) have business interruption cover.
While for some, this is a deliberate choice in an attempt to reduce costs, Prue Willsford, CEO of ANZIIF and the Know Risk Network, says that many business owners may not be aware of the many risks their businesses face.
“People generally only account for the things they can see and touch, so businesses usually insure those things, such as buildings, stock or vehicles ,” says Willsford.
“But it’s the risks we don’t see or know about that can hurt us the most.
“While a property can be rebuilt and stock can be replaced, it’s the halt on your potential to earn that has the greatest impact on any business.”
Unforeseen factors can leave your business vulnerable and whether there’s a delay in rebuilding, or an interruption to the supply chain, the cost to cash flow can be severe.
Take for instance a fire in a thriving commercial laundry business that was servicing the city’s hotel industry as its primary source of income. Due to a faulty thermostat, a fire broke out in one of the company’s large, purpose-built dry cleaning units and destroyed it completely. While the flames were contained to that area, the smoke and water damage to the rest of the laundry and the garments within was considerable.
Every business has its risks and the savvy owners of the laundromat thought they had a thorough understanding of theirs. After the flames died down, they quickly put their disaster recovery plan into action, prioritising towel delivery to key customers by working a third overtime shift in three locations and putting on extra collection and delivery runs to ensure the customers received the contracted deliveries of their personalised garments and towels.
However, no matter how prepared they were, keeping the business going was arduous and costly. From overtime payments, to securing additional drivers and vehicles to re-route deliveries, to paying for overtime staff — and their meals — the price of remaining open and keeping those highly-prized customers happy was considerable.
This frantic level of activity went on for a number of months and the toll on the business was significant. As a replacement unit could only be sourced internationally, the delay forced the owners to concentrate their efforts on keeping their existing clientele, thwarting plans to gain new business.
It took nine months before the laundry was up and running normally again, the total cost exceeding $1 million. Fortunately, the owner’s business interruption insurance included cover for “Additional Cost of Working”, which covered the unforeseen costs of simply staying afloat and the shortfall in earnings for new business.
“It’s not just damage to property or stock people need to consider,” Willsford says.
“As seen here, the time it takes to get back to full capacity and the extra cost of maintaining a business can be immense. Having the right coverage in place is critical.”
Statistics show that almost 50% of SMEs will fail after a major loss. Thankfully, for the owners of the laundromat, their insurance coverage enabled them to make a full recovery.
“Extended delays in rebuilding or reopening after a loss are all too common. This is a prime example of how the added costs of staying afloat have the potential to cripple a business,” Willsford says.
“Try as you might, you cannot expect the unexpected, so business owners need to ensure that whatever happens, they have cover to not only pay their staff and pay their bills, but get up and running again as quickly as possible.”
Know Risk is a free, independent, practical risk and insurance information resource for the small business community designed to help business owners better understand the risks their businesses face. For more information, visit knowrisk.com.au or download the free Know Risk Insurance Tracker app.