The Importance of Business Risk Planning

The Importance of Business Risk Planning

–  Chanelle Taylor (Head of Cornerstone Financial Planning)

As a business owner, you need to be aware of a multitude of factors as a lot goes into running a thriving business. You, unfortunately, can’t be mindful of absolutely everything.

Worrying and stressing about your business is a given, but you can mitigate these feelings by putting a strategy in place to alleviate the risks that concern you. There may even be risks involved that you are unaware of, and that is where seeking professional help will be of use to you. You don’t have to be aware of everything if you have professional help to guide you to financial wellness.

“Risk Management lets you appreciate the risk while you let someone else shoulder all the worry.” ― Anthony T. Hincks

IN THIS ARTICLE

  • What is business risk planning?
  • What business risk planning consists of:
    • Buy-and-sell agreements/partnership assurance.
    • Keyman insurance
    • Business overheads replacement
    • Contingent liability planning
  • Why your business needs a business risk plan.

What is business risk planning?

Business risk planning consists of assessing, evaluating, and managing the risks involved in business operations, systems, and processes. Business risks refer to the susceptibility a company or establishment has that can affect the success of the company; such risks can lower profits and lead to the failure of a business.

Succession planning and management act as a compass for businesses to make sound decisions that consider risks and how these can affect the prosperity and growth of your company.

Business risk planning consists of:

1. Buy-and-sell agreements/partnership assurance.

Business risk planning is all about looking into the future and deliberating what could go wrong and how you can plan for the “what ifs”.

In the unfortunate situation that a business owner passes away or becomes gravely impaired (unable to do their job), there needs to be an agreement in place that would keep the business running and thriving. Succession planning creates a seamless and integrated strategy where new owner/s are instated to run the company.

Changing ownership can be an intense time for everyone, and if it is not organised correctly, many issues may arise. Without a succession plan, the business is at risk of going under as there might not be enough funds to support the company during the owner handover.

Furthermore, the family and other owners may not agree on the succession or people who are ill-equipped to manage the company are in line to take over.

A succession plan will ensure that the correct measures are in place so that the company can continue operating at full capacity regardless of an owner handover.

A buy-sell agreement/partnership assurance is a type of succession plan. These agreements are an effective form of protection for family members and businesses. In the case of the death or disability of an owner, this agreement will ensure that the remaining business owners purchase the interest of the departing partner.

In concurrence with a buy-sell agreement, a business needs a payment plan for the departing owner’s interest. The most favoured option involves the purchase of life insurance.

2. Keyman insurance

Each company has one or more key people that are essential for the continued operation of the company. Whether that is an employee or director, there are always a few people that the company counts on. If something were to happen to one of these people, what would happen to the business? This situation could cause a loss of revenue and extra costs associated with replacing and training a new person to take over the position. Key person cover protects the company against monetary loss while the transition is implemented.

Key person cover will guarantee that your company will have financial security and assurance even if you lose an integral employee. Accidents can happen, and by utilising this form of cover, you can safeguard your business from unexpected trouble.

Key person insurance can cover your company against a range of risks. For example, it may provide:

  • Insurance to protect profits—for example, offsetting lost income from lost sales or losses resulting from the delay or cancellation of any business project involving a key person.
  • Insurance to replace a key employee, recruitment fees & training costs.

3. Business overheads replacement

Every business has overhead costs to cover on a monthly basis. Overhead costs include rent, utilities, insurance, legal fees, office supplies, advertising, payroll, and accounting fees.

You still need to be able to pay for your overheads regardless of whether a business partner passes away. Business overhead replacement protects against financial loss by paying out a monthly amount to cover these expenses.

These plans can cover most overhead expenses including:

  • Rent and the mortgage interest of your business premises.
  • The interest portion of debt repayments.
  • The salary of staff unable to generate revenue in your absence.
  • Utilities and property taxes.
  • Regular maintenance services.
  • Internet and telephone service.
  • Accounting services.
  • Insurance premiums.

Life and business carry on, whether you can work or not, and you need a failsafe to ensure your business will not take a financial hit.

However, it is important to note that business overhead insurance policies do not cover the cost of hiring temporary replacements. For example, if an electrical contractor becomes disabled, the policy does not cover the cost of hiring another electrician on a temporary basis.

Also, these plans are designed to cover temporary periods of disability and as such have maximum payout periods. Personal disability insurance is available for long-term or permanent disability.

4. Contingent Liability Planning

Dealing with any form of debt can be debilitating; business debt is one of the worst.

Contingent liability insurance is a policy taken out by a company on the life of a business owner who stands surety for its debts.

Contingent liability planning will assist you if there is a circumstance where the owner/s have passed away or are unable to work, and there is a debt that needs to be settled, as well as a suretyship that must be cancelled.

If your business defaults on a loan, it means you are personally liable for that debt you stood surety on. If something were to happen to you, a loan might be brought forward, which would impact your personal estate. Contingent liability cover ensures that your estate is not impacted by your business debt.

Why does my business need a business risk plan?

Planning ahead and covering all your bases will only benefit you and your business in the long run. Being organised by using professionals will ensure that all the risks involved have been thought of and planned for and a strategy has been implemented in case of any sudden occurrences.

Our team of experts would gladly sit down and talk with you about your business and what you should be considering. We want you and your company to succeed, by planning for business risks, you are on the right track already.

Speak to an Expert Financial Adviser

Cornerstone Financial Services Group has experts in the field to relieve you of the burdens of business risks.

You can reach the Cornerstone Financial Services Group of companies by:

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business risk planning, business risks, buy and sell agreements, financial wellness, keyman insurance, manage business risk, Succession planning

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