Ask yourself and then your Accountant this one question every year

Understanding the must-haves and the nice-to-haves

As a child, I remember hearing people say ‘you have to spend money to make money’.

It was one of those comments you would always feel the need to nod in agreement with, even though what it actually meant was a complete mystery to me.

I've gotten a little older now but the reason behind that statement still escapes many small business owners today.

In this article

Understanding the must-haves and the nice-to-haves

Many business owners if asked this simple question about their business, would probably stumble on the answer. So here's the question. How would you (and your business partner) answer?

‘What's your monthly cost of fixed expenses for staying open for business?’

If you know your answer you probably appreciate the pivotal part these numbers play in your cash flow planning. If you don't, read on and I’ll give you a six-step process you can follow.

Make a point of knowing the cost of your business's annual fixed overheads

When you look at your list of recurring bills for your business, they’re predictable, and therefore measurable.

Those costs will be different for different businesses, but the reason for those costs are the same - ‘you have to spend money to make money’ - and keeping the doors open for business, regardless of whether you’re making money, costs money.

The financial risk of being open for business

It's these fixed costs that usually cause a significant problem if the owner or director is sick or injured and can't work. While a sick business owner will try to pay the business’s fixed costs from their own income protection insurance, this puts further strain on them and their families at the worst possible time, particularly because income protection insurance only reimburses up to 75% of your personal earnings. Trying to play fixed business expenses from a reduced personal income is a recipe for disaster.

The solution is straightforward but unknown to many small business owners. It's called ‘insure your business’s fixed operating costs.

How does it help?

  • Business expenses insurance will usually pay the fixed expenses for up to 12 months and is designed to cover recurring business expenses and help keep the business functional if its owner cannot work due to sickness or injury.

Who is it designed for?

Primarily self-employed people.

It’s vital for Sole Traders, as they're completely personally responsible for the fixed expenses of the business and it’s equally important for small Partnerships to ensure that each partner is covered for his or her share of business expenses costs.

Pro tip: This insurance is not something that's automatically covered in your ‘annually need to renew general business insurance’ package. Business expenses cover is part of the personal insurance range. This means once the policy is in force, regardless of any potential future changes to your health or age, the policy will stay in force without you needing to reapply for it each year. That's why it might take longer to set up, but once you have it in place, that's peace of mind.

Knowing your annual fixed costs is so easy you really have no excuse

If you're yet to know your annual fixed operating costs, here’s what to do.

Step 1. Send an email to the accountant today and ask, ‘What am I spending on my fixed overhead expenses each year?’

Step 2. Then divide that figure by 12 for the monthly cost (or 4 for quarterly if you like to keep track of expenses with your BAS reporting responsibilities).

Step 3. Ask yourself out loud ‘How long could I pay those monthly costs from my personal income or savings if I couldn't work?’

Step 4. Send an email to your business risk adviser for a quote to cover that amount in case of sickness or accident, or even an unexpected disability or death.

Step 5. If you're in a business partnership with another person and haven't had this conversation yet, refer to step 1.

Ultimately business overheads insurance helps make sure unpaid fixed business expenses don't force you to close your doors while you're off work recovering.

Pro tip: Different insurance product providers have different policy definitions so make sure to use a professional who can work with your accountant, assess your needs and complete the research for a strategy that's right for your business. For example, some companies cover the principal and interest on a business loan, while others will only cover the interest.

What can qualify as an insurable fixed business expense?

  • Rent, property rates, land tax
  • Accounting & audit fees
  • Equipment and vehicle leasing or hiring costs
  • Business loan repayments (principal & interest)
  • Business insurance premiums
  • Gas, electricity, phone, water
  • Bank fees & charges
  • Professional fees & subscriptions
  • Contracted repairs & maintenance
  • Computer servicing expenses
  • Cleaning & Laundry
  • Remuneration of non-income generating employees (salaries, super, FBT)
  • Business vehicle registration and insurance
  • Security or advertising costs incurred under a contractual arrangement with a third party
  • Principal and interest payments under a mortgage
  • Postage, printing, stationery
  • Potential Locum hire
  • Courier costs
  • Other industry-specific expenses are agreed to in writing by the insurance provider.

Terry’s case study

Terry has a small warehouse distribution and courier business that employs three staff and rents commercial premises on a 5x5x5 lease arrangement. The annual portion of his budget for the business fixed costs is about $125,000. This equates to about $25,000 a month. This is made up of wages, vehicle leases, power and security, internet and phone expenses, and his accounting and insurance costs.

How Terry approached the issue

  • These are the fixed costs (often contractual in nature) that need to be paid regardless of whether the business is profitable or not and regardless of whether Terry is working or not.
  • Terry knows that if he is sick or injured and unable to work, he is personally liable to ensure the fixed costs continue to get paid.

This is why Terry had always had his fixed business expenses insured.

While Terry may have some backup income and use his spouse's income to rely upon when needed, that would not be sufficient to keep the business infrastructure going.

While business expense insurance is just one component of a comprehensive business protection strategy, the majority of savvy business owners agree it's the one insurance policy that is a must-have, rather than a nice to have.

The last word

Don't let the daily regular overheads of your business put you out of business. The reality is, ‘you have to spend money to make money’.

You can learn more about Fixed Business Expenses Insurance at my commercial brand Sapience Financial.

Drew Browne Modern Small Business thought-provocateur
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