This week yet another report brings to our attention that small businesses are being the most hurt by the current economic conditions of rising costs and acute staff shortages.
The survey conducted by Perceptive on behalf of 2Degrees found that small businesses were the least optimistic and were bearing the brunt of the labour shortages.
So how is it that many SMEs are still being sold an insurance solution which is calculated on the cost of replacing the business owner when one of the most significant issues they already face is the inability to recruit staff to meet their current needs?
Given that we, as advisers to business owners, should understand the economic environment and that our duty is to provide advice and solutions which are suitable to a client’s needs, then we have a responsibility to make an appropriate assessment of the financial risk and likely mitigations before recommending a course of action.
This must start with a thorough understanding of the current situation of the business.
One of the most effective ways to do this is to start your consultation with the owner with drawing an Operational diagram of their business. No matter what industry or size of the business, there will be multiple functional or operational areas such as Finance, Admin, Sales, Services, Purchases, Quoting, Invoicing, Maintenance.
The key difference in a small business is that the business owner -sometimes with the help of their spouse or a staff member- does almost every function including the provision of the service.
So, you might wonder what’s the point of doing an operational diagram if every key function is done by the owner? Surely the business owner already knows that.
The key point is that it creates a picture of the whole business that you and the business owner can objectively look at and use as your framework for the risk discussion.
The operational diagram helps the business owner ‘step back’ and see the breadth of their role in the business and the broad range of skills needed to run the business in their absence. In my experience it almost eliminates the response – “I just need someone to replace me “- to the ‘what’s the impact if you’re not here question’. Typically, when a business owner responds that way, it is because they are only thinking of the technical task they do as opposed to ‘all the hats’ they wear throughout their week.
It also helps you as the adviser ‘step back’ to see that in most businesses it’s not just a case of replacing the direct revenue generating function such as the plumber, the builder, the electrician, the mechanic – that even a very small business still requires management functions to run successfully.
Once you and the business owner breakthrough the notion that it’s not just a simple case of replacing the labour function within the business you will be able to have a more meaningful discussion about the problems the business will really face without the key person and you will be able to develop a financial risk forecast and solution which is more likely to solve the business problems.
I get that insurance based on meeting the cost of replacing the key person in the past, has been and still maybe is an easy ‘sell’ but in reality, has rarely been an appropriate solution for very small businesses. In the current economic climate, it would seem hard to justify it as advice suited to a business owner’s circumstances and needs.
Mastering the competence to facilitate the Operational Diagram concept will help you have deeper and more meaningful discussions with your business clients which will lead to better risk management outcomes.
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Note: This article was recently published as part of Risk Info NZ’s Adviser Focus Series.