BIG Plans Admin July 26, 2015 No Comments

How to use business income insurance

How to fund your business cash flow by using business income insurance.

What options do you have to keep your cash flow going when you cannot work in your business in the short, medium or even long term.  There are a number of ways you could do this, but firstly, you need to give careful thought to what is going to happen to your business if you become unable to work due to sickness or accident, and would you manage such an event and how would you fund it using business income insurance as well as other sources of income.

Part of my risk management planning for business income insurance is to assess the impact a disability will have on their business in the short, medium and long term.

  1. Short term disability 1 to 4 weeks
  2. Medium term disability which is up to 1 year
  3. Long term and permanent disability up to age 65

Statistically speaking, you will be unable to work for a period of up to 6 months, before you reach age 65.

We all like to think we are bulletproof and it happens to the other person, but proper planning prevents poor performance.  Having a well thought through risk management plan and business income insurance to make sure your business continues to operate, or until you can keep it operating at full value until you can sell it, is a smart move.

I read in a local paper one day “due to ill health, the owner needs to sell…”

I really do not like seeing these adverts like this, especially worded like this and I wonder what is the story behind these ads.  Did the business owner plan for risk or did they think they were bullet proof?  I will never know the answer to that question and there may be genuine reasons why the business was being closed.  I would almost be certain they did not have business income insurance. My point is, they were obviously out of money and had to sell the business urgently.  My secondary thought was; does the person who created that ad care about the business owner and what they would get for their business?  If they did, I am sure they would not have used such a headline.

What the ad was saying to me was “Fire sale bargain, the owner is desperate, make a low offer, they are going to have to take it”

I know you have worked hard to build your business, and now you have personal financial commitments to your family, staff, customers and usually the bank.  Maybe you have even borrowed against the family home.

Having a good business plan and strategy is just another important part of your business, and planning for financial risk and having a plan is a part of it.  This is where a good business income insurance solution may make or break your business.

My recommendation to clients is to take time and think where revenue would come from, how much would be received, and how long would it last in the event of your disability.  From my experience as a business insurance broker most business owners are able to get revenue from the following sources;

  1. Current business reserves
  2. ACC
  3. Accounts receivable
  4. Bank loans (existing facilities)

Where finances fall to pieces is when clients are not able to keep enough cash flow going, or if they can, it cannot be sustained not long enough, or at some stage, it needs to be paid back then the debt starts to mount up.  Keep in mind that banks may not want to advance new funds and credit if you are unable to perform in your business, so I would only take into consideration your current facilities, and would not rely on new facilities being provided.

When assessing eligibility for ACC, remember that they may pay on accident only, so you would not normally qualify for any sickness related disability or degenerative conditions, and ACC is to help you with your personal income, not your business cash flow.

To find out whether you have enough resources to keep your cash flow going or whether you need business income insurance, take a quick look at your options, but remember for each option you need to know the following.

  1. How much would you receive or have access to
  2. How long would this last
  3. Does it need to be paid back, if so, when and how much

How do I work out what I need for business income insurance?

Planning for risk and how much business income insurance you may or may not need, and for how long, is not rocket science.  You just need to work through each option systematically;

  1. Determine how much it costs to run your business each month.  You MUST include you on the personal income you derive from the business, tax everything as if were fully operational.
  2. Work through each potential revenue source, how much you would get, how long you would receive this income (including loans).
  3. Work out how long your business could continue to run using these other forms of income.
  4. Determine at what point you will run out of cash flow, for example, 1 month, 2 months 6 months etc
  5. Where you run out of income from those sources is where you need to be implementing a business income insurance policy and use that to fill the gap between when you run out, and when you return to work or sell your business if you cannot return to work

Personal advice

This article is a very cut down version of what I go through with my business clients.  There can be a number of variations because some answers may then present some more questions first, so personal advice from a Registered Financial Adviser who is qualified to assist you with business income insurance would certainly be a smart move (and yes I am one).

Whether you do anything about the shortfalls is up to you, but at the very least you will understand the financial position of your business better thank you did before, and that alone is valuable.

As always, if you need help or would like an assessment for income business insurance your business, please contact me anytime.

business income insurance