Small business protection means being prepared for the punches so that you can roll with them when disaster strikes. Many small businesses need to re-examine their approach to insurance and take a more active role in assessing their needs.
Small business owners spend most of their time working hard to establish, maintain and serve their clients and business. This doesn’t leave much time for pondering potential future challenges and establishing safeguards to protect their business against adversity.
Sydney Business Exchange owner, Colin Bennie, has over 20 years of experience as a business broker and has often been involved in selling the same business more than once. Colin’s years of experience have left him with enough stories of success and failure to rival the Lord of the Rings trilogy. Colin believes it’s how a business owner handles and prepares for the adversity that is ultimately the difference between success and failure. Adversity comes in many forms, from the most known to the least-considered, such as industry and technology changes, and personal health and relationships.
It doesn’t matter if you’re a new start-up, taking over an existing concern, or a long-term business owner, there are many steps and actions you need to take that will protect your business. The following is a top-level roadmap to help you in planning for your business longevity and ongoing success and growth.
Small business insurance
Business insurance is standard protection, however, many start-ups and home-based businesses neglect this. Obviously, it’s important to be covered for fire, property, burglary, and glass, however, this type of insurance does not protect you from failure to plan your business.
A recent report by the Chartered Management Institute revealed only one in three small businesses have a proper business contingency plan. Although most managers indicate business contingency is an important part of business, and auditors, insurers, and even customers expect the business they deal with have them, it seems small businesses struggle with funding specifically for contingency management.
Realistically, how does a small business owner calculate risk and endeavor to create a contingency plan? The answer is that you must dedicate time, perform some type of risk assessment and devise solutions and contingencies for each area identified.
A risk management process involves:
- identifying the risks related to your business activities
- assessing the likelihood and possibility of an event occurring
- identifying which events are the most serious and prioritise accordingly
- establishing how to respond to each risk identified
- developing systems and processes to manage and solve issues as they arise
- monitoring and maintaining your risk management for maximum effectiveness.
There is the well-known story of Nudie, the juice company that lost everything in a factory fire in 2004, but still managed to keep the business alive and flourishing despite the initial setback.
“I was watching as the fire engulfed the factory and I turned to my marketing director and said, ‘We’ve got to find a new factory tomorrow’. It just didn’t occur to me that we would not rebuild the business. Like starting a business, it was a big project, you just have to start doing things, step by step by step,” said Tim Pethick, Chief Executive Officer, Nudie Juice, in an interview on reachout.com.au.
Business interruption is one area that is out of your control and a crucial area often overlooked by small businesses. However, bills, rent, and staff do not go away just because you lose your ability to earn. Some of the typical things covered by business interruption are:
- rent, loss of income and wages
- marketing and advertising if a business is required to relocate
- loss of income/profit for the period the business was unable to operate.
Business compliance and regulation
Depending on your business type you may need to comply with a variety of business licenses or local council permits to ensure your business is operating legally, and to comply with insurance. In Australia, each level of government (Local, State, and Federal) has regulations that may apply to your business. To get a proper understanding of your regulatory obligations, you should seek information from each of the levels of government. To find out what regulations affect you:
Local council permits also need to be considered in business contingency. An example exploded last year on Sydney’s Northern Beaches when the Manly council changed the arrangements of seating permits, which saw two restaurants, Waterview and Crystals, fighting for their share of outdoor seating. This had a very damaging effect for both businesses and wasn’t a good promotion for the council as thousands of tourists and visitors walked down the Corso past “Sack Manly Council” signs.
Cover for business technology
Everyone knows the heartache of losing data on a computer. But how seriously could this affect your business? How good are your backup systems? Is there an offsite copy of all of your data, accounts, contacts, and software licenses?
Only recently I experienced a fatal hard drive error that saw my laptop die, which in the grand scheme should not be a major loss. I actually consider myself to be a power IT user, however, I was still humbled by the inconvenience and loss of my laptop. Fortunately, all my client-sensitive data was well protected on our password-protected server. However, in my role, I use a large number of propriety specialist software packages that I have subscribed to. Not only had I lost all of these software programs (which were stored locally), I had also lost all of my purchasing and license information. For a very tech-savvy person, I was struck hard with the reality that I was not fully prepared. This cost me a lot of time recontacting each of these software companies so they could reissue my license information.
Businesses should always have an offsite copy of their data, including all accounting and financial information, email, passwords, and software licenses.
Online backup services:
Businesses totally dependent on their IT infrastructure need to plan for potential outages or issues with their IT systems, and how this will affect their ability to earn money. Small businesses are more vulnerable to issues relating to the disaster, as they often don’t have the resources to plan and prepare for disaster recovery.
Small business needs to consider:
- Data backup and recovery
- Customer information
- Email correspondence
- Financial information
- Sales and shipping
- Other data that cannot be replaced
- Anti-virus software
- Firewall management
If you are in a retail business and your technology fails for whatever reason, ensure you have a system in place for manual invoicing, cash sales, and manual credit card transacting, to minimize or prevent loss from being unable to trade while a resolution is sought.
Passwords and data security
You probably already have too many passwords to keep track of, from the basic PC and network logon to multi-point security for online banking and other financial services. Then you have to ensure your passwords are safe from unauthorized access. This is where password management software comes in. Not only is it good for keeping all your passwords on or offline, but it can also help generate security password levels to protect your vital data from prying eyes.
Examples of password software solutions include:
Changing consumer behaviours
In the words of Bob Dylan, “The times they are a-changin’,” and small businesses need to watch their industry and be aware of the changes that can affect their entire business model. In the early 2000s, we saw the collapse of Webster Publishing, a leading educational CD-ROM company in the 1990s that was unable to continue its market share of CD-ROM distribution against free online encyclopedias, such as Wikipedia and the internet search engines in general. Businesses that don’t adapt and evolve their revenue models do not survive. New opportunities, avenues, and endeavors need to be explored every step of the way.
The humble record shop can no longer be found on every corner and the once-thriving video store seemed destined for the same fate – until recently. With Foxtel’s imminent release of movies-on-demand, Video Ezy had to adapt its business model. Recent news articles indicate the embattled corporation will be releasing an Electronic Video Store, which its 3.5 million customers will be able to buy and install in their homes. There has been an ongoing debate as to how to distribute movies, but video retailers, who have struggled against slow broadband services, have finally come up with an alternative.
Subscribers will be able to preview movie shorts on their home set-top box and then choose the ones they want to rent. When they visit the virtual video store, the selected movies will be encrypted and copied onto an iPod or other USB storage device. A passkey will need to be entered and the customer will be able to view the movie for a set period of time.
To keep abreast of where your particular industry is heading, subscribe to related magazines and online newsletters, and try to make time for conferences and expos about the technology-driven changes that are happening in your market.
All eggs in one basket
Another business contingency often overlooked by small businesses is dependence on one large customer or supplier. Take, for example, an Australian, family-owned soap and toiletries manufacturer that had been a supplier to a major supermarket chain for many years. Their long relationship with the chain ended when the buyer at the chain retired and the replacement no longer wanted to continue purchasing the product. A devastating blow for most businesses, however, the company adapted its wholesale model and continues to grow its business and use its factory and infrastructure to service a number of brand names.
Location, real estate and business
Some businesses are dependent on their location for their business. For example, if you have retail premises that rely on passing traffic or you have been able to achieve cheap rent in a warehouse for many years, changes to local real estate prices, or big developments could have a devastating effect on your business. How do you protect a local group of shops against the new mega-mall? Unfortunately, there isn’t one easy answer, but adaptability and change are core to longevity. Factories often need to be relocated as real estate prices and developers revamp industrial areas into uptown urban apartments, and small business owners need to develop and establish their niche. The local butcher needs to become a specialist in providing ready-made meals and the local deli needs to become organic or gourmet to attract people away from supermarkets. Each individual business needs to find its place, its market and secure its customer base to ensure ongoing viability.
Loss of a key staff member, partner or core skilled individual
Colin Bennie, from Sydney Business Exchange, says one of the main reasons for people needing to sell their business is due to loss of people or skills from a business. Too often, this is due to illness or relationship or partnership breakdown. Research from the Chartered Management Institute further supports this with only 29 per cent of small businesses addressing the potential loss of people, despite the fact that 35 percent experienced business disruption as a result of this in the past year.
Too many small business owners and managers keep crucial information in their heads, rather than recording it. A business is very vulnerable when one person is core to its success. Business owners should establish procedures and processes for each step of their business activities, and ensure they are recorded in a central place, both electronically and in a procedure manual, for easy access and use by all staff.
Communicating your contingency plan
Another major area of business concern is the failure of small business owners to communicate their contingency plans to staff. What happens to your business if the chef calls in sick, there is a black-out, or the server won’t reboot? What happens if the supplier of your specialty product goes broke? Do you have an alternative supplier? Few small companies include business contingency plans in staff inductions and most fail to communicate contingency so a business can continue to run smoothly. The best plan of attack for small businesses is to heed the advice of the Scout motto “Be prepared”.
Llewellyn Jones, NRMA ’s head of retail business insurance, offers this advice on protecting your business
What are the biggest mistakes retail business owners make regarding insurance?
The biggest error is not taking the time to properly identify the risks facing their business. Obviously, some risks can be insured and passed on to the insurer, but other things such as compliance with legislation, and supply management have to be actively managed by the business owner. Once there’s a focus on the insurable risks, they should equally focus on those risks they have to actively manage themselves. That’s critical.
With insurance, there are two critical questions to answer:
- What cover is required?
- What level of cover should the business owner buy?
What about random or unexpected disasters hitting business?
Most businesses easily identify some property damage risks, such as fire or storm. But they often forget about the financial interruption to their business. Business interruption insurance covers the business’ cash flow while it is interrupted as a result of damage, either to the premises itself or to adjoining premises. Many people don’t consider that if something happens to an adjoining building, it might restrict access to their business and affect sales and profit.
Start-up businesses often learn how to protect their businesses on the fly. What are the main insurances they need to consider when setting up?
The obvious covers are:
- fire and property, including burglary and glass
- public liability and products liability
- business interruption.
It doesn’t provide for business failure because of a poor business plan, but it protects you in those early days when cash flow can be critical. I would also recommend that start-ups engage a valuation service to make sure they have adequate cover. If you are moving into, or have just bought, premises, you need to understand the associated rebuilding costs. If the building burns down, you may have restrictions or may have to rebuild with certain materials to comply with building regulations, which might cost a lot more than you paid for the building.