Being in business involves risks. Some you’ll be aware of, others may have escaped your attention.
You have three main choices with risk:
- Accept the risk and its consequences
- Take out insurance to protect against the risk
- Manage the risk to reduce or eliminate it
If you choose the first strategy, think hard about the consequences. Could your business survive the possible financial loss? If you can’t afford the insurance cover now, make a note to get it as soon as possible.
Most business owners use a combination of the second and third strategies. They insure against the major risks they face, but also take active steps to reduce, minimise or eliminate risks.
Identify the types of insurance that are relevant to your business from the list below and talk to your NAB Small Business Banker about tailoring an insurance package to suit your business.
Asset protection insurance covers your premises, equipment, vehicles and contents from theft, fire, flood or other damage. But if you have a home office, it’s important to check that your home and contents insurance also covers the business use of equipment such as computers and printers. If it doesn’t, then you’ll need a separate policy for your business assets.
Public liability insurance protects you and your business against financial claims if you or your employees are found liable for the death or injury of a third party, or damage to their property through negligence. For example, a customer might be injured on your premises or employees might cause property damage while working at a customer’s site.
Product liability insurance covers any legal action arising from death, injury or damage caused by a product that your business manufactures or markets. If you’re an exporter, you may need to look into this insurance for overseas markets as well.
Business disruption insurance protects you against loss of revenue from events such as a fire, flood, earthquake or damage to your computer systems.
Professional indemnity insurance gives you personal protection against claims arising from professional advice you've provided.
Key person insurance
In many businesses, the loss of a key staff member could be devastating. For example, in a small business built around the abilities and personality of the owner, the loss of the owner could drastically lower both revenues and the value of the business – or even cause its collapse. Key person insurance covers the business and its shareholders or partners against this risk.
If you have employees, worker’s compensation insurance is compulsory. This insurance protects you and your workers from financial hardship in the event of a workplace injury.
While it’s important to insure your business against major business risks, your first line of defence should always be risk management. The payoff for active planning and risk management is less risk of disruption to your business. Additional bonuses can include lower insurance premiums, better staff productivity and more credibility in the marketplace.
Risk management involves regularly reviewing the risks your business faces and developing processes and procedures to manage, reduce or eliminate the risks. For example, good risk management policies can reduce two major trading risks:
- Efficient credit management and debt collection policies can both improve your cash flow and reduce the risk that you won’t get paid
- Good risk management can reduce your exposure to currency exchange and interest rate volatility if you export and ensure you select the most suitable payment methods
Risk management isn’t just good business practice - in many cases it’s also required by law. For example, you have to comply with Occupational Health and Safety obligations to avoid prosecution for an unsafe workplace or work habits (such as not wearing protective gear where necessary). Beyond compliance, a safe and healthy work environment delivers many advantages. You can:
- avoid the costs, damage and disruption to your business caused by workplace injury and illness
- improve productivity and attract better quality staff by showing employees that you care about their welfare
- save yourself and your team from unnecessary stress, worry and distraction from business tasks
Your insurance company will expect you to meet these legal obligations.
Many insurance policies require you to take active steps to reduce risk. It’s important both to understand and implement these requirements. For example, a policy may specify certain security and safety measures that must be in place, such as keeping your alarm and sprinkler systems maintained or keeping codes secure. Failing to comply with these conditions could invalidate your insurance.
Take advantage of the risk management advice and services offered by many insurance companies or industry specialists (such as computer consultants). By reducing your risks, you can cut your claims and lower insurance premiums.
Managing your premises can prevent many problems:
- Draw up a list of items that need regular inspection and maintenance. For example, cleaning drains and gutters can reduce storm damage
- Avoid fires from electrical faults by using only licensed electrical contractors to install new wiring or check the safety of your existing electrical systems
- Ask your local fire station for advice on preventing fires. Smoke detectors, fire alarms, extinguishers and sprinklers are vital to alert people to danger and prevent fires from spreading
Draw up a maintenance schedule for all your assets, such as manufacturing machinery, vehicles and office equipment such as computers. For example, manufacturing businesses should ensure all parts of their production lines are functioning correctly and at their maximum efficiency. Equipment failure can mean late delivery, lost orders and cash flow problems.
You might end up deciding to accept some of the other risks your business faces. For example, insurance against staff dishonesty or fraud can be costly for a small business. You may have to accept the risk but take sensible precautions. Other security risks are simply uninsurable, such as losses from shoplifting, losses from a contract failure or losses from a major customer going bankrupt while still owing you money.
Computers and data loss
Computers represent a major risk for businesses. Back-up all computer data regularly and store the back-up tapes off site or investigate other options such as online data storage (cloud computing). Install lightning and surge protection devices. Fluctuations or cuts in the power supply can cause loss of data so consider investing in an Uninterruptible Power Supply (UPS). Ban employees from installing software or importing data until it has been virus-checked – computer viruses can wipe out your entire system. If you have an Internet connection, install a firewall or make sure any built-in firewalls are switched on. Keep your anti-virus software and spyware protection up-to-date.
Burglar alarms are a good visible deterrent. Ensure burglar alarm codes and keys are only available to authorised staff. Ensure all telephone line faults are dealt with immediately. The fault could’ve been caused by a burglar to disconnect your alarm from the security call centre. Make sure all visitors identify themselves and state who they’re visiting. Restrict them to the reception area until the person they’re visiting arrives. Appoint a person to check the premises are secure at the end of each working day. Lock away hazardous and flammable substances in secure storage and ensure your no-smoking policy is rigorously enforced. Schedule regular fire drills so all employees are aware of the procedures.
Theft and fraud
Many kinds of theft can be prevented by securing your premises. Other threats come from within your organisation and can easily be overlooked. Mark all equipment with your business name and keep a register of serial numbers. Some equipment, including computers, can be cabled to desks or bolted down. Your insurance policy might insist on this precaution.
Theft by employees can add up to large amounts of money. Vet all new employees - especially those who handle money or have access to computer systems. Use passwords to restrict access to sensitive data and implement an IT policy requiring employees to keep passwords secure and confidential. Petty theft is a common problem. Allow only authorised employees to order equipment or stationery.
Finally, developing a contingency plan (or business continuity plan) for critical events will help you to recover from any disaster in the fastest time possible. For example, how would you cope if your computer system broke down and you lost your software and all your data?