We all have tough times in business financially, and the worst thing we can do…
What Did They Mean When They Said, “You Have to Spend Money to Make Money?”
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.
Many business owners if asked a simple question about their business, would probably stumble on the answer. How would you (and your business partner) answer the following question?
- What’re your monthly fixed expenses for staying open for business?
If you know the 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 pay 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 are 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:
Send an email to your accountant today and ask, “What am I spending on my fixed overhead expenses each year?”
Then divide that figure by 12 for the monthly cost (or by 4 for quarterly cost if you like to keep track of expenses with your BAS reporting responsibilities).
Ask yourself out loud “How long could I pay those monthly costs from my personal income or savings if I couldn’t work?”
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.
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 ensure that unpaid fixed 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.
A quick list of what can qualify as an insurance fixed business expense.
These are some of the more common types of regular fixed operating expenses of running a business:
- Rent, property rates, land tax.
- Accounting and audit fees.
- Equipment and vehicle leasing or hiring costs.
- Business loan repayments (principal & interest).
- Business insurance premiums.
- Gas, electricity, phone and water.
- Bank fees and charges.
- Professional fees and subscriptions.
- Contracted repairs and maintenance.
- Computer servicing expenses.
- Cleaning and laundry.
- Remuneration of non-income generating employees (salaries, super, FBT).
- Business vehicle registration and insurance.
- Security or advertising costs incurred under contractual arrangement with a third party.
- Principal and interest payments under a mortgage.
- Postage, printing and stationery.
- Potential Locum hire.
- Courier costs.
- Other industry specified expenses 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 5 x 5 x 5 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.
- 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 these fixed costs continue to get paid. This why Terry has always had his fixed business expenses insured.
While Terry may have some backup income and has his spouse’s income to rely upon that would not be sufficient to keep the business infrastructure going.
While business expenses 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.
Don’t let the regular daily overheads of your business put you out of business. The reality is, “You do have to spend money to make money”.
“The opinions expressed by Smallville Contributors are their own, not those of www.smallville.com.au"
SHARE THIS ARTICLE WITH LIKE MINDED SMALL BUSINESS PEOPLE