Optimism is the fuel that drives the entrepreneurial spirit, so it isn’t surprising that most business owners consider themselves optimists. Too much optimism, however, can get a business into trouble. A business plan built solely on the “best case scenario” is like a house of cards—one gust of wind (or fire or wrongful termination lawsuit) and the entire business can come crashing down. That’s why businesses temper their innate optimism with a healthy dose of reality. In other words, they learn to manage risk.
The first step in implementing a comprehensive risk management plan is identifying potential risks. To help you get started, we have provided a list of the top 10 threats facing small to mid-sized business owners. As you read through the list, consider the unique risks facing your business and ask yourself whether those risks are being managed effectively.
1. Protecting your Property
Property holdings are often business' largest asset. Therefore, for the long-term security of your business, it is vital that you evaluate potential threats to your property and develop a plan to manage those threats. Begin by taking a complete inventory of all your assets to determine how a loss might affect your business and how much coverage you need. Property coverage can come in many forms to suit your specific needs, but a typical policy will provide the replacement cost value for your building and the actual cash value for your business property.
You have a lot weighing on your budget already, but don’t make the mistake of planning for the “best case scenario” when it comes to your property coverage. Leaving your small business underinsured is a risk too great to take.
2. Business Interruption
The U.S. Department of Labor estimates that more than 40 percent of businesses never reopen following a disaster such as a fire or flood. Is your business prepared to weather the storm if disaster strikes? If a fire causes your facility to be temporarily unusable, what would you do? Ideally, you would move to a temporary location while your permanent place of business is being repaired, but traditional Property Insurance does not cover this move or the loss of income while the permanent business location is being repaired (unless you have the proper Business Income and Extra Expense coverages/limits). Ill-prepared businesses are often forced to completely shut down operations during repair, which can do irreparable damage to their brand and leave employees without work for extended periods of time. Business Income is invaluable, though often overlooked, coverage that safeguards your business by covering operating expenses and lost income while the permanent business location is being repaired. This will allow you to maintain payroll and, if needed, reallocate current employees to help with the cleanup effort. Insulate.
3. Liability Losses
No matter how well you plan, running a business can be fraught with unexpected surprises—the only way to completely avoid liability is to shutter your business. Smart businesses do the next best thing: protect their assets by carrying adequate Commercial General Liability (CGL) Insurance coverage. CGL policies provide coverage for claims of bodily injury or other physical injury, personal injury (libel or slander), advertising injury and property damage as a result of your products, premises or operations. A CGL policy with adequate coverage limits enables you to continue normal operations while dealing with real or fraudulent claims of negligence or wrongdoing, and also provides coverage for the cost of defending and settling claims.
4. Key Person Losses
Many small businesses are built around the talents and expertise of a few individuals. If an employee crucial to the functioning of your business departs unexpectedly due to death or injury, would day-to-day operations continue as usual or would disorder and uncertainty ensue? Would you be able to maintain your current level of performance and current revenue stream? How would you cover for the financial loss of the employee or pay for a temporary replacement during his or her recovery? Key Person Insurance can help you answer these questions with confidence. This coverage is designed to provide financial stability in a time of stress and uncertainty, allowing you to keep your business moving forward without missing a beat.
5. Injuries to Employees
Businesses have the responsibility to indemnify workers who are injured or become ill during the course of their employment. Many businesses do not realize the full effect workplace accidents have on their organization. Beyond initial treatment costs and lost production time, on-the-job injuries have an impact on insurance premiums, which can increase your costs for years to come. Thankfully, by managing exposures and promoting safety, it is possible to control workers’ compensation premiums. Having the proper pre- and post-accident procedures in place can drastically reduce the severity of a workers’ compensation claim, and implementing a comprehensive safety program can reduce the accident rate. Together, these two steps can produce tremendous long-term savings.
6. Managing Electronic Data and Computer Resources
Some businesses often lack a formal IT department or even rudimentary internet security measures, which leaves them vulnerable to unscrupulous cybercriminals searching for an easy target. With an estimated liability of more than $200 per compromised record (multiplied by hundreds or thousands of customer records), the cost of a single data breach incident can be devastating for a business. If your business stores customer records electronically, it is crucial that you have robust security measures in place. In addition to taking preventative measure to reduce Internet-based exposures, specialized technology coverage, such as Cyber Liability Insurance, can help protect your business against damage from cyber attacks, data breaches and other Internet-based exposures.
7. Environmental Exposures
Think of a business with significant environmental exposures. What comes to mind? Most people think of a large manufacturing, mining or petroleum operation, but these are not the only industries at risk for environmental liability losses. It is important to perform a comprehensive risk analysis to determine your own level of exposure. Keep in mind that because most commercial insurance policies contain pollution exclusions, unless you carry Environmental Insurance, you may be uninsured against significant environmental loss exposures.
8. Employment Practices
From the moment you begin the pre-hiring process until the final goodbyes at the exit interview, you are at risk for a lawsuit. In fact, three out of five employers will be sued by a prospective, current or former employee while they are in business. Although many lawsuits are groundless, defending against them is costly and time-consuming. Your business should take a hard look at whether it can afford to defend itself against accusations of wrongful employment practices. If not, there is an insurance solution called Employment Practices Liability that will protect your company against wrongful termination, discrimination (age, sex, race, disability, etc.) or sexual harassment lawsuits.
9. Contracts
In many cases, businesses become saddled with large additional risks, accepted via risk transfer from savvy suppliers or customers. While it’s tempting to shave costs by skimping on legal fees, making sure your business isn’t accepting additional and unnecessary risk can save you a lot of money over the long haul, both in legal costs and in insurance coverages.
10. Manage Your Supply Chain
Do you rely on one or more third-party suppliers to produce certain components used in your products? If you do, a disaster that interrupts your supplier’s regular business operations could have a crippling effect on your production abilities. Although you should always try to minimize potential liability through contingency planning and other risk management techniques, as supply chains grow across the globe, sometimes there is little you can do about the exposures faced by your suppliers. In a perfect world you could simply avoid doing business with companies that present numerous risks or that are unwilling to conform to your standards, but pricing constraints and niche markets limit the number of potential suppliers to choose from. Supply chain insurance is meant to cover losses you incur as a result of an interruption to your supply chain. Such coverage allows you to work confidently with suppliers who face exposures beyond your control.
Other items to consider
- Do you have employees that travel outside the USA?
- Do you have a board of directors?
- Do you have fiduciary responsibility with respect to your company sponsored health and/or 401k plans?
- Does your company give advice and/or conduct design work?
Insurance is a key component of any comprehensive risk management plan, but successful risk management also involves prevention, training and contingency planning.
Tuesday, June 5, 2012
Thursday, May 31, 2012
Unique Exposures of Family-Owned Businesses
Family-owned companies comprise approximately 90 percent of businesses in the United States. With increased employee loyalty and deep-rooted pride in their products and services, family companies are the backbone of our economy.
While any business’ relationships can be complex, adding a family dynamic to the mix creates a labyrinth of unique issues and risks to navigate. Many family business owners believe they are at low risk for claims; however, the opposite is true. Director and officer claims, employment-related lawsuits, fiduciary liability and more afflict family businesses just as much as other companies. In fact, they may even have more of an impact, since many family companies typically lack the business plans and established policies to mitigate those risks.
To leverage your family dynamic and create success for your company, use this list as a starting point to identify and understand the unique risks of family-owned businesses so you can create a risk management plan to address the issues and avoid costly lawsuits.
1. Informal Business Plans and Company Policies
Do you document responsibilities and expectations for each member of your family? Does your family have a written policy of who’ll walk the dog? Do you make your teenagers sign a contract when they want to borrow the family car?
Family life isn’t usually dictated by a formal corporate structure, written policies or strategic long-term planning. Unfortunately, this informality tends to carry over to a family-owned business as well, which is dangerous when the majority of a family’s assets are tied up in the business. Some family companies lack solid business plans; company policies, if documented at all, tend to be informal. Long-term strategizing, including who will take over the business, is often nonexistent. As a result, some companies fail.
Investing the time in creating a detailed business plan, clearly-written company policies that are consistently enforced and defining roles for everyone (especially family members) involved with the business, is important. Devise a plan that balances family goals and business goals, and meets the needs of both.
2. Employment-related Issues
In family companies, family members fill roles as owners, employees, advisors and shareholders. Unfortunately, business interactions get complicated when family roles blend—or clash—with business roles. The dissonance between someone’s role in the family and their role in the business can create confusion.
Hiring nonfamily employees or attracting nonfamily board members brings a fresh perspective and a certain degree of impartiality that can benefit any family-owned company. Unfortunately, sometimes these talented individuals shy away from these roles in fear of nepotistic practices. Management duties such as hiring, firing and disciplining both family and nonfamily employees can be a challenge.
One of the biggest exposures for any company continues to be employment practices liability claims. Be cognizant of how you treat and compensate both family and nonfamily employees, and make sure it is consistent and fair to avoid claims. Furthermore, selecting the most qualified individuals to fill roles at your company—whether they are family members or not—will benefit your business in the long term.
3. Family Conflict Becomes Business Conflict
“Leave your personal problems at the door”—an old adage that means keep your personal matters separate from work life. Is this really possible in a family-owned business? In many family businesses, it’s difficult to separate family conflicts from business conflicts. Some conflicts are deeply ingrained and have been recurring since childhood, such as sibling rivalry. On the other hand, the effect of a single, family-wide crisis—divorce, sudden illness or financial troubles—can create turbulence in the company as well.
Keeping family conflict totally out of business matters may be difficult to achieve, but it’s important to continue working toward establishing healthy boundaries between your family life and the business. Family conflicts are often emotion-based. Avoid allowing these emotions to lead to irrational decision-making for your business. Communication is crucial; manage family conflict by identifying the issues that cause conflict and stress, discussing these issues with the family and developing a policy to address them.
4. Lack of Communication
As with any business, communication is the fuel that keeps the company moving. In a family-owned business, issues arise when important things are shared with those family members, and nonfamily employees and shareholders are left behind.
Communication should be a two-way conversation and it’s critical to include both family members and nonfamily employees. It’s also important to speak to all employees in a professional manner. The informal communication, like teasing and joking, with family during personal time is one thing; avoid speaking in this way while conducting business. Family employees have been known to file harassment claims, too.
5. Director and Officer Concerns
Large, family-owned companies have the risk of director and officer liability, especially regarding how the business is being managed. Family companies are at risk for lawsuits that arise from employees, customers, competitors, shareholders and regulatory agencies. Since family and business goals become intertwined, you may make decisions for nonbusiness reasons that do not maximize the shareholders’ welfare. Whether shareholders are family or nonfamily members, they hold all directors and officers of the company liable for effectively managing their investment.
Be aware of director and officer liabilities, including:
• Conflicts of interest occur if the majority shareholder gained benefits from the sale or purchase of company assets he or she controlled.
• Freeze-out mergers occur when the minority shareholders are forced to sell their stock for less than market value.
Directors and officers of a family-owned company have the same fiduciary responsibilities—duty of care, duty of loyalty and duty of obedience—as executive management does at any other private or public company. In many cases, family shareholders have invested a considerable amount of their assets in the company. Fiduciary duties should not be neglected, even if all of your shareholders are part of the family.
6. Complying with Government Regulations
One of the biggest areas of compliance for family-owned companies involves estate plans. Without an estate plan, family companies will pay higher estate taxes than necessary. Estate taxes can be quite costly if the family wishes to continue the business when ownership is transferred. Most family business owners want their estate to go to their heirs and not taxes.
You want to optimize the transfer of ownership while minimizing estate, gift and transfer taxes. Consult an attorney who understands family business laws concerning transferring business assets across generations. Tax laws are constantly changing. When you establish an estate plan, you should already begin saving money for taxes.
7. No Succession Plan or Exit Strategy
In the event of major illness or death, who will lead your company into the next generation? This may be a question you don’t want to think about, or you may feel no one can do the job as good as you can, or that your successor is not ready for the job. However, having a plan for succession is critical if you want your company to have future success. Some business owners plan their exit strategy and groom their successor under their tutelage for years; some are forced to do this quickly in the case of a sudden illness or unforeseen death.
Succession planning can take years; don’t wait until a crisis hits to start planning. To ensure the ownership or management transition is as seamless as possible, use a comprehensive succession plan with four phases: initiation, selection, education and transition. Choose a successor based on their qualifications and competency—this may not necessarily be a family member—but make sure they are qualified for the job and have the company’s best interests in mind. Then, give the reins of your company to your successor, one at a time.
You may have to engage the assistance of outside advisors during this process. A professional business consultant or an advisory board made up of nonfamily members who can take the “family dynamic” out of the planning process can lead your company to a successful future.
I will be honest this was a difficult subject to write about because of some of the tough issues I touched on. Just remember that this was written as friendly advice not to condemn.
While any business’ relationships can be complex, adding a family dynamic to the mix creates a labyrinth of unique issues and risks to navigate. Many family business owners believe they are at low risk for claims; however, the opposite is true. Director and officer claims, employment-related lawsuits, fiduciary liability and more afflict family businesses just as much as other companies. In fact, they may even have more of an impact, since many family companies typically lack the business plans and established policies to mitigate those risks.
To leverage your family dynamic and create success for your company, use this list as a starting point to identify and understand the unique risks of family-owned businesses so you can create a risk management plan to address the issues and avoid costly lawsuits.
1. Informal Business Plans and Company Policies
Do you document responsibilities and expectations for each member of your family? Does your family have a written policy of who’ll walk the dog? Do you make your teenagers sign a contract when they want to borrow the family car?
Family life isn’t usually dictated by a formal corporate structure, written policies or strategic long-term planning. Unfortunately, this informality tends to carry over to a family-owned business as well, which is dangerous when the majority of a family’s assets are tied up in the business. Some family companies lack solid business plans; company policies, if documented at all, tend to be informal. Long-term strategizing, including who will take over the business, is often nonexistent. As a result, some companies fail.
Investing the time in creating a detailed business plan, clearly-written company policies that are consistently enforced and defining roles for everyone (especially family members) involved with the business, is important. Devise a plan that balances family goals and business goals, and meets the needs of both.
2. Employment-related Issues
In family companies, family members fill roles as owners, employees, advisors and shareholders. Unfortunately, business interactions get complicated when family roles blend—or clash—with business roles. The dissonance between someone’s role in the family and their role in the business can create confusion.
Hiring nonfamily employees or attracting nonfamily board members brings a fresh perspective and a certain degree of impartiality that can benefit any family-owned company. Unfortunately, sometimes these talented individuals shy away from these roles in fear of nepotistic practices. Management duties such as hiring, firing and disciplining both family and nonfamily employees can be a challenge.
One of the biggest exposures for any company continues to be employment practices liability claims. Be cognizant of how you treat and compensate both family and nonfamily employees, and make sure it is consistent and fair to avoid claims. Furthermore, selecting the most qualified individuals to fill roles at your company—whether they are family members or not—will benefit your business in the long term.
3. Family Conflict Becomes Business Conflict
“Leave your personal problems at the door”—an old adage that means keep your personal matters separate from work life. Is this really possible in a family-owned business? In many family businesses, it’s difficult to separate family conflicts from business conflicts. Some conflicts are deeply ingrained and have been recurring since childhood, such as sibling rivalry. On the other hand, the effect of a single, family-wide crisis—divorce, sudden illness or financial troubles—can create turbulence in the company as well.
Keeping family conflict totally out of business matters may be difficult to achieve, but it’s important to continue working toward establishing healthy boundaries between your family life and the business. Family conflicts are often emotion-based. Avoid allowing these emotions to lead to irrational decision-making for your business. Communication is crucial; manage family conflict by identifying the issues that cause conflict and stress, discussing these issues with the family and developing a policy to address them.
4. Lack of Communication
As with any business, communication is the fuel that keeps the company moving. In a family-owned business, issues arise when important things are shared with those family members, and nonfamily employees and shareholders are left behind.
Communication should be a two-way conversation and it’s critical to include both family members and nonfamily employees. It’s also important to speak to all employees in a professional manner. The informal communication, like teasing and joking, with family during personal time is one thing; avoid speaking in this way while conducting business. Family employees have been known to file harassment claims, too.
5. Director and Officer Concerns
Large, family-owned companies have the risk of director and officer liability, especially regarding how the business is being managed. Family companies are at risk for lawsuits that arise from employees, customers, competitors, shareholders and regulatory agencies. Since family and business goals become intertwined, you may make decisions for nonbusiness reasons that do not maximize the shareholders’ welfare. Whether shareholders are family or nonfamily members, they hold all directors and officers of the company liable for effectively managing their investment.
Be aware of director and officer liabilities, including:
• Conflicts of interest occur if the majority shareholder gained benefits from the sale or purchase of company assets he or she controlled.
• Freeze-out mergers occur when the minority shareholders are forced to sell their stock for less than market value.
Directors and officers of a family-owned company have the same fiduciary responsibilities—duty of care, duty of loyalty and duty of obedience—as executive management does at any other private or public company. In many cases, family shareholders have invested a considerable amount of their assets in the company. Fiduciary duties should not be neglected, even if all of your shareholders are part of the family.
6. Complying with Government Regulations
One of the biggest areas of compliance for family-owned companies involves estate plans. Without an estate plan, family companies will pay higher estate taxes than necessary. Estate taxes can be quite costly if the family wishes to continue the business when ownership is transferred. Most family business owners want their estate to go to their heirs and not taxes.
You want to optimize the transfer of ownership while minimizing estate, gift and transfer taxes. Consult an attorney who understands family business laws concerning transferring business assets across generations. Tax laws are constantly changing. When you establish an estate plan, you should already begin saving money for taxes.
7. No Succession Plan or Exit Strategy
In the event of major illness or death, who will lead your company into the next generation? This may be a question you don’t want to think about, or you may feel no one can do the job as good as you can, or that your successor is not ready for the job. However, having a plan for succession is critical if you want your company to have future success. Some business owners plan their exit strategy and groom their successor under their tutelage for years; some are forced to do this quickly in the case of a sudden illness or unforeseen death.
Succession planning can take years; don’t wait until a crisis hits to start planning. To ensure the ownership or management transition is as seamless as possible, use a comprehensive succession plan with four phases: initiation, selection, education and transition. Choose a successor based on their qualifications and competency—this may not necessarily be a family member—but make sure they are qualified for the job and have the company’s best interests in mind. Then, give the reins of your company to your successor, one at a time.
You may have to engage the assistance of outside advisors during this process. A professional business consultant or an advisory board made up of nonfamily members who can take the “family dynamic” out of the planning process can lead your company to a successful future.
I will be honest this was a difficult subject to write about because of some of the tough issues I touched on. Just remember that this was written as friendly advice not to condemn.
Wednesday, May 9, 2012
Supply Chain Risk
According to a recent survey done by Zurich that included 550 companies in 60 countries, in 2011 85% of the companies in the study experienced at least 1 supply chain interruption. Furthermore, 40% of those interruptions were below the tier one level, and 50% of the companies that experienced an interruption saw a decrease in revenues.
In general CFOs normally include supply chain interruptions as a top 5 risk exposure for his or her company. Also with more and more pressure on companies to cut costs, companies are forced to keep lower inventory levels. In return, this creates more vulnerability. In addition, companies are sometimes forced to partner with lower cost suppliers, and if these suppliers are located in catastrophe prone and/or uneasy political areas the risk to the supply chain increases even more. Fewer Suppliers = More Risk and Risk vs. Cost?
Risk Management Tips:
- Analyze bottlenecks in-house
- Create a "critical agreement" with your main suppliers. In this agreement your company and supplier will acknowledge the "critical partnership", and a contingency plan will be put into place if either of you experiences an interruption in business.
- Request a contingency plan from your main suppliers if a "critical agreement" is not in place
- Conduct in-house scenarios. What ifs? Mitigation strategy?
- Risk and Financial Assessment with your broker and insurance carrier.
- Obtain Supply Chain Insurance
Supply Chain Insurance is an "all risks" business interruption coverage which is not restricted to property damage. It allows you to risk transfer your supply chain risks for named supplies and suppliers.
Source: Zurich Insurance Company
In general CFOs normally include supply chain interruptions as a top 5 risk exposure for his or her company. Also with more and more pressure on companies to cut costs, companies are forced to keep lower inventory levels. In return, this creates more vulnerability. In addition, companies are sometimes forced to partner with lower cost suppliers, and if these suppliers are located in catastrophe prone and/or uneasy political areas the risk to the supply chain increases even more. Fewer Suppliers = More Risk and Risk vs. Cost?
Risk Management Tips:
- Analyze bottlenecks in-house
- Create a "critical agreement" with your main suppliers. In this agreement your company and supplier will acknowledge the "critical partnership", and a contingency plan will be put into place if either of you experiences an interruption in business.
- Request a contingency plan from your main suppliers if a "critical agreement" is not in place
- Conduct in-house scenarios. What ifs? Mitigation strategy?
- Risk and Financial Assessment with your broker and insurance carrier.
- Obtain Supply Chain Insurance
Supply Chain Insurance is an "all risks" business interruption coverage which is not restricted to property damage. It allows you to risk transfer your supply chain risks for named supplies and suppliers.
Source: Zurich Insurance Company
Thursday, January 19, 2012
CFO's - Watch your WC costs
Here are 11 keys to prevent overcharges from robbing your financial statement:
1. Check your Experience Mod work sheet to confirm it’s 100% correct.
2. Establish relationships with medical providers that understand the Workers’ Comp system.
3. Delete the words “Hospital emergency room.” Only send injured employees to an ER as a last resort.
4. Take injured workers to the doctor/medical providers. Show your worker and the med provider how much you care.
5. Know the importance of proper payroll reporting. Report and pay premiums only on payroll that is necessary. You may have been overcharged for a considerable period. Even reporting lower payrolls may result in higher costs because of how the system operates.
6. Demonstrate a zero injury tolerance. Continually stress and educate your team in the disastrous effects of on-the-job injuries.
7. Check to see that you are receiving all the forms and information you are entitled to from the insurance company so you can monitor progress toward a minimum Experience Modification Factor.
8. When your insurance company pays for medical treatment and lost wages to an injured employee due to an injury resulting from a third-party’s negligence, make certain you have a process to follow up with your insurance company for recovering money spent so you are not penalized.
9. For “first-aid” type injuries, treat them yourself. Typically, claims of $500 or less carry substantial penalties. Payments of $500 or less, penalize you. We’re not suggesting you pay them, but review with your insurance company to see if there’s a better process for reducing your costs caused by smaller payments by the insurance company.
10. If you have employees in other states, different rules may apply. Check them out.
11. If you are a 24 hour business or multiple location/state business, do you have standard processes to cope with after hour or multiple state differences?
Source: Institute of WorkComp Professionals and the HAUSER group
1. Check your Experience Mod work sheet to confirm it’s 100% correct.
2. Establish relationships with medical providers that understand the Workers’ Comp system.
3. Delete the words “Hospital emergency room.” Only send injured employees to an ER as a last resort.
4. Take injured workers to the doctor/medical providers. Show your worker and the med provider how much you care.
5. Know the importance of proper payroll reporting. Report and pay premiums only on payroll that is necessary. You may have been overcharged for a considerable period. Even reporting lower payrolls may result in higher costs because of how the system operates.
6. Demonstrate a zero injury tolerance. Continually stress and educate your team in the disastrous effects of on-the-job injuries.
7. Check to see that you are receiving all the forms and information you are entitled to from the insurance company so you can monitor progress toward a minimum Experience Modification Factor.
8. When your insurance company pays for medical treatment and lost wages to an injured employee due to an injury resulting from a third-party’s negligence, make certain you have a process to follow up with your insurance company for recovering money spent so you are not penalized.
9. For “first-aid” type injuries, treat them yourself. Typically, claims of $500 or less carry substantial penalties. Payments of $500 or less, penalize you. We’re not suggesting you pay them, but review with your insurance company to see if there’s a better process for reducing your costs caused by smaller payments by the insurance company.
10. If you have employees in other states, different rules may apply. Check them out.
11. If you are a 24 hour business or multiple location/state business, do you have standard processes to cope with after hour or multiple state differences?
Source: Institute of WorkComp Professionals and the HAUSER group
Friday, January 6, 2012
Captive Insurance - Worth a Look
As your company competes in this challenging economy it is always important to look for ways to be become more efficient and increase profit marigins. One avenue for this is to consider looking into captive insurance. It has a multitude of tax advantages along with ways to take "total control" of your company's insurance program(s)
This article was put together by our good friends at Dinsmore & Shohl.
Here is a link to Dinsmore's article: Captive Insurance
This article was put together by our good friends at Dinsmore & Shohl.
Here is a link to Dinsmore's article: Captive Insurance
Thursday, January 5, 2012
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