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Every business faces risks – such as to reputation, staff retention and capital. Yet many can be managed with an effective plan. Financial protection helps to guard against potential losses or interruptions to revenue. This is especially important in 2023 as many businesses in Norfolk and across the UK face greater pressure on margins (e.g. due to higher inflation) and falling consumer spending due to higher interest rates (encouraging people to save) and lower real disposable household income. Below, we offer four financial protection ideas for business owners. If you want to discuss your financial plan with us, please get in touch to arrange a no-obligation financial consultation:
#1 Cash reserves
The basic layer of financial protection for any UK business – whether a limited company, partnership or sole trader – is having an “emergency buffer” ready. This not only helps to see you through periods of lower revenues (e.g. seasonal changes in sales), it can also buttress the business finances if a sudden expense comes its way – such as needing to replace a valuable piece of equipment. A good rule of thumb is to have no less than 3-6 months’ worth of operating expenses available in easy-access savings.
#2 Keyman insurance
If a key employee dies or is diagnosed with a critical illness which prevents them from working, what would happen to your business? This can suddenly throw a business into chaos as time, money and effort are spent finding a replacement – possibly suffering revenue losses all the while (e.g. if you lost your sales director). Here, keyman insurance (or key person) insurance can help. It provides a much-needed lump sum in this scenario – giving both owners and other stakeholders peace of mind that the business can keep growing.
An owner can take out keyman cover for any person they deem crucial to their business – provided they have the person’s consent. For a small business in Norfolk, such as a two-person startup, this type of insurance can be especially valuable since each person is likely to be crucial to the survival of the business. Larger businesses can benefit too, helping to guard against falling profits and increased workloads for other staff members if a crucial team member is suddenly absent. If certain principles are met, the premiums will usually be tax deductible, with any policy proceeds taxed on the business as a trading receipt (although this should be confirmed with the tax inspector). Where the principles aren’t met, usually no tax relief will be given on premiums but HMRC may or may not treat a policy payout as a trading receipt – it’s at their discretion.
#3 Shareholder protection
For company directors, the death of a shareholder can represent a business risk. After all, in this scenario the deceased’s company share is deemed to be part of his/her “estate” – thus passing down to beneficiaries. This means that your company could end up partly owned and influenced by people who have little interest or experience in it.
Shareholder protection helps to avoid this scenario by providing a legal agreement between the business and the shareholder. This policy provides the former with the funds to buy the share(s) from the latter’s estate upon their death (which they are obliged to sell to the former if the surviving shareholders exercise their option to buy). This takes away the pressure for other shareholders to raise funds to buy back shares from each other if there is a death, terminal illness or critical illness.
#4 Employee benefits
The success of any business largely rests upon its employees. If you have happy, loyal and engaged staff, they are more likely to invest their futures with the business and go the extra mile to help ensure its success. By offering a great employee benefits package, a business can (indirectly) enhance its own financial protection by encouraging staff motivation and wellbeing. This can also help with your recruitment efforts, since you can show that you take your duty of care seriously as an employer.
Some examples include “death-in-service” benefits, which can provide a payout to your employee’s family members if they die whilst working for you (e.g. 4x annual salary). Another idea might be group income protection or group critical illness cover. The former goes beyond mere Statutory Sick Pay if an employee needs time off work due to illness or injury, providing a replacement income (e.g. two-thirds of their salary) as they get back on their feet. The latter offers a lump sum payment if a staff member is diagnosed with a specific medical condition such as a heart attack. Group private medical insurance can be another attractive option.
For small business owners in Norfolk, it might be worth talking to an adviser about relevant life plans (since you likely cannot enjoy group benefits such as the above). These pay out benefits to a discretionary trust if an employee dies, usually intended for family members of the deceased (i.e. the trust beneficiaries).
If you are interested in discussing your own financial plan or investment strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense: