Insurance and its impact on cash flows of small businesses

In this fast-paced world, we all are aware that risks are inevitable and every business has a risk.

If a business is in the early stage, then it poses more risk for the business owners to manage their cash flows. According to a study, 90% of small businesses fail due to mismanagement of their incomes and expenses. Unforeseen expenses in a small business can pose a major threat to the micro-businesses.

If you ask us, what could be the solution? Well, theoretically, micro-business owners can build up a “cash cushion” which helps them to cover unexpected expenses and can be a savior in the months when a company makes low sales.

This sounds like a plan and definitely can ensure protection in the hard times of the business but the loophole of this strategy could be that most of the small startups don’t have the bandwidth to cover lawsuits or property damage. They can barely meet ends in the initial phase.

It means that if a client or any third party (suppliers, customers, vendors) refuse to make payments claiming any reason, a business still might have enough to survive for a few months but will not have enough for expensive errors and omissions lawsuit.

Now, on one hand, paying for lawyers and other legal expenses not only drains down the bank account in no time but also takes out your precious time which you would have rather spent on growing your business. Now, if you ask us, what could be the solution to this? Well, the most important and sustainable one is to have proper business insurance. It not only covers all costs associated with the liability lawsuit, lawyers’ fees, court expenses, settlement and judgment fees etc. but also can save your business from going bankrupt during the tough times.

The major challenge that most insurance owners in a start-up face are to structure an insurance plan. Poorly and carelessly structured insurance can adversely affect the entire business thus increasing cash outflows. To improve your insurance structure, you can consider the following points drafted by us:

  • Increase your deductibles. The lower your deductible is, the higher will be the monthly premium. It’s not wise to have a low deductible since the primary purpose of having insurance is to cover major losses. While making claims when deductibles are low, your premiums are going to rise.

  • Eliminate unnecessary coverage: Now, a business might have a lot of insurance policies and most of them cover the same thing. One example would be to opt for an umbrella policy and having more than the required minimums on car and homeowners liability for the umbrella to kick in. Get rid of the policies that don’t cover the unforeseen major events like accidental death, short-term disability and other policies with limited coverage.

  • Rely on the Umbrella Policy. The best feature of Umbrella policies is that they provide liability coverage over and above your existing policy/policies (automobile or homeowner’s). So if your liability coverage isn’t enough to cover damages, a personal umbrella insurance policy kicks in where your other liability underlying limits have been reached. One can almost double their coverage with a wisely structured umbrella policy. It also helps to lower the premiums.

  • Extend the elimination period on disability insurance. The elimination period is the period which lies between the onset of a disability, and the time you are eligible for benefits. It’s essentially the deductible period for disability insurance. Premiums are extremely high for thirty or sixty day periods. Premiums drop substantially for 180-day periods or longer.

  • Focus on life-insurance. Long-term care insurance may not be required if you have a proper provision on your life insurance death benefit (accelerated death benefit rider).



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