The sustainable business PREPARE. ACT. SURVIVE.

BY RICHARD ELMES

The Sunshine Coast economy thrives on the backbone of small to medium-sized businesses, creating a web of interdependence. For business owners, financial success is often intertwined with personal financial health, extending responsibility to employees, their families, and business partners, including suppliers and contractors. Therefore, having a plan to manage both business and personal cash flow risk is crucial for sustainability and fulfilling a vital role in the local economy.

Armed with a global career in investment banking at Credit Suisse and Morgan Stanley, and project consulting with Macquarie Bank and CBA, I founded Agile Wealth to help people build brighter futures and achieve financial freedom through wealth management. After 30 years in the corporate world, I turned my focus to aiding local business communities as a professional financial advisor. This article discusses key risks to sustainable cash flows and business success.

Understanding Business Risks

Business risk encompasses issues affecting systems, processes, people, and finances. Staying on top of the evolving factors is crucial. System risks have evolved, with cybersecurity being paramount. Process risks and opportunities are significantly influenced by AI in our rapidly changing world. The economic climate, both globally and locally, also impacts financial risk. Currently, cost of living pressures may affect consumer behaviour and, consequently, your business.

However, our experience shows that people risk—our highest and most disruptive risk—has the greatest impact on business sustainability. Without key people, most businesses cannot function.

PREPARE. ACT. SURVIVE.

Once a business risk is identified, action is necessary. Being prepared enhances our capacity to survive when things go wrong. Avoiding risk is not usually practical in business. A business owner may need to accept some financial risk for growth or purchasing equipment. Responsible business owners find ways to manage risks effectively to ensure peace of mind.

When reducing or offsetting business risk isn’t possible, transferring the risk to an insurance contract is common. This is practical for public liability or asset protection. Businesses often overlook the loss of human capital when considering risks. For most small to medium-sized businesses, sustainability depends on the capacity of their people to operate daily. Protecting your business from unexpected events is critical.

Managing Key Person Risks

A good way to identify key person risks is to ask, “What do we do if…?”

Short-term disruptions

For most businesses, having a cash buffer is essential. Consider temporary outsourcing or cross-training your team. Higher-risk, cashflow-sensitive businesses might consider business expenses insurance.

Medium to long-term disruptions

Managing medium to long-term risks is more complex. The primary solution is risk transfer through insurance. Small to medium-sized businesses typically lack the cash reserves or alternative capital sources to offset the prolonged absence of key personnel, so key person insurance becomes essential. For owner-operators, consider the interdependency with personal financial risks. Consult with your financial advisor to ensure adequate coverage.

Worst case scenario: permanent disruption

Consider the impact of permanent health disruption to yourself or key personnel:

• Personal financial impact

• Financial impact on staff and their families

• Financial impact on suppliers and creditors

• Cost and time to close your business

• Complexity of tax planning and unwinding affairs

• Ownership consolidation with shareholders or partners

Death cover and permanent disability insurance, along with buy-sell agreements, are critical. Businesses with partnerships should discuss these agreements with their advisors.

You and your team are your business’s most valuable assets. Effective management of people risks is vital for sustainability. We often insure tangible assets but overlook insuring our key people. Have a plan, understand your financial risks, and seek help from qualified advisors.

DID YOU KNOW?

• For correct tax treatment, key person insurance should be classified for revenue or capital purposes.

• Death or permanent disablement insurance can act like a will for the business with a buy-sell agreement.

• Families of shareholders may be entitled to profits after a partner’s death or disability, which can impact business costs and ownership obligations.

• Critical illness insurance provides options for business risk management, covering diagnoses rather than work capacity.

• Some insurance policies might not cover you if you leave employment to start a business. Check your coverage.

• Own Occupation disability cover assesses your ability to work in your specific occupation, while Any Occupation considers any suitable occupation based on experience and training.

• From 1 July 2024, the concessional contribution cap is $30,000, and the nonconcessional contribution cap is $120,000.

• If your super balance is under $500,000 as of 1 July 2024, you can utilise catch-up contributions within the cap of the relevant year.

• A tax offset of up to $540 is available for a $3,000 super contribution to an eligible spouse.

• Government co-contributions of $500 apply for a $1,000 non-concessional super contribution with a total income less than $45,400, with reduced co-contributions up to an income of $60,400.

• From 1 July 2024, the tax threshold is $135,000 before the 37% tax rate and $190,000 before the 45% tax rate, allowing you to pay yourself up to $135,000 at a 30% tax rate.

https://www.agilewealth.com.au/