If you’re a small business owner, you’ll be familiar with the fact that the cost of insurance premiums can be a financial burden on your business.
But the question of affordability runs both ways.
Not only should you ask: “Can I afford business insurance?” It’s also important to ask yourself: “Can I afford to not have insurance in place in case of natural disaster or property loss?”
This may be some of the best business advice you receive.
Some Recent Numbers
• 2011 Queensland floods – over $500 million
• Cyclone Marcia 2015 – $150 million
• Anzac Day hail storm in NSW – $70 million dollars
The statistics above are just a few examples of the figures insurance companies pay out when disaster strikes.
For many small business owners, when a natural disaster or other loss of property occurs, an insurance payout is the difference between being able to recover, or facing financial ruin.
As a small business owner, there’s a good chance that your life savings are tied up in your business. If that’s the case, failing to insure your business against the risks of fire, theft, professional indemnity, workers’ compensation, business interruption, loss of property, or natural disaster could lead to a loss in productivity, a reduction of profits, or even bankruptcy.
With the wild weather conditions of the past few years, the importance of insuring against natural disaster has become apparent. But it’s also important to consider insuring against the other risks described above.
Understanding Your Business Insurance Needs
If you want to find the right insurance cover for your business, then the first step is to identify your main areas of risk. This will often depend on the type of business you run. For example, a small legal practice will probably not need the same level of accident or workers’ compensation insurance that a construction company will require.
Once you’ve identified the main areas of risk, you must assess each risk to determine the severity of the potential loss associated with it. This helps you decide the amount of cover you need.
You may decide that self-insuring or saving a set amount of money each month is adequate to cover some of your potential losses. For other areas, you may decide that a formal policy from an insurance provider is a more appropriate protection. It’s about balancing what’s affordable now (in terms of insurance premiums, etc.) with what’s affordable long-term if you experience a disaster.
Finally, make sure you understand the fine print. Some policies may not cover you for certain situations. A good example is making sure you’re covered for each of the different types of flooding your business could be exposed to. (That’s right, there are different types of flooding.) By reading the fine print and understanding your policy schedule, you can take steps to prevent the potential heartbreak of discovering you’re not insured for a disaster you’ve experienced.
How Cash Flow Forecasting Can Help
Most insurance companies now offer multiple payment options, including pay-each-month arrangements, and discounts for premiums paid in full before a certain date. By utilising a cash flow forecast, you can understand the impact that paying these different premium options will have on your business’s cash flow and position. This will help you to determine the most appropriate payment method for your circumstances.
A word of caution: many pay-each-month insurances are designed so that you must pay the annual premium in full before a payout to your business is made. This means that the balance of your insurance premium will be taken from your payout, so you receive less compensation following a claim. Be careful to keep this in mind when choosing the right business insurance for you.
GST and Insurance
If your business is registered for GST, and you hold an insurance policy for an asset you use either partly or wholly for business purposes, you can claim a partial or full credit for the GST included in the premium. If the asset is used wholly for business, you can claim the full GST credit. If it’s also used privately, you can claim a portion of the credit that reflects the proportion of business use.
Can You Afford Insurance?
As you can see, business insurance is usually something you can’t afford not to have.
If you’d like to know exactly how much insurance your business can afford, and how paying different insurance premium options will impact your business’s cash flow and position, EzyAccounts can help. Call us today on 1300 313 397.