Supporting Financial and Legal Aspects
As well as making great business and commercial sense (subjects we cover in the earlier sections ‘Making Business Sense’ and ‘Helping You Profit from Commercial Sense’), BC features other advantages too, some of which you may not have considered. In this section we discuss how introducing BC brings benefits relating to insurance, contractual obligations and profit margins.
What the insurance industry says about BC
The 2011 Business Continuity planning survey produced by the British Insurance Brokers’ Association (BIBA) and the Cabinet Office contains the following valuable information:
Sixty-two per cent of respondents said that those businesses with a Business Continuity Plan (BCP) will benefit from doors opening to new markets, a premium discount or a reduced excess.
Forty-four per cent of respondents said that business interruption insurance would benefit from improved terms or discounted premiums if a robust BCP was in place.
Of the insurer partners that responded, 83 per cent said that they would give a discount or improve terms to a business interruption policy if a BCP was in place.
Various respondents stated that a tangible benefit of a BCP was turning what would probably be an unacceptable risk into one that insurers would underwrite.
Ninety-six per cent of respondents with sufficient information on BC felt that having a BCP in place kept businesses trading when they would have otherwise likely failed, or that it seemed to reduce the cost of disruption significantly.
The emergencies/disruptions that respondents most frequently had to deal with were flood or escape of water at 41 per cent and fire at 33 per cent.
Some respondents stated that a BCP could be a condition of cover for high-risk business interruption exposures instead of giving a discounted premium.
Forty-eight per cent of respondents said that insurers always suggest that customers arrange a BCP or suggest adoption of a BCP if asked what an organisation can do to be more resilient.
Covering what your insurance doesn’t
When disruption hits, many businesses assume that their insurance policies are going to cover it. Although insurance policies can help businesses recover, and in a lot of cases the policies are mandatory, insurance alone just doesn’t cut the mustard (whether your business is supplying condiments or not!). Here are the reasons:
Insurance doesn’t cover your firm’s reputation. Insurance policies may well pay out in most cases, but remember that you need to carry on delivering to your customers the day that the disruption hits.
Insurance claims take time to settle. Unless you have contingency plans to keep trading, you can be waiting weeks or even months before receiving payment and being able to buy more stock.
Insurance final settlement figures don’t cover all your losses if an excess applies, if you’re underinsured or an uninsured area is involved. Therefore, you may well have a shortfall in what your business has lost and what your insurance company actually pays out. By having BC arrangements in place, you’re more likely to be able to keep cash coming in and lessen the effect of your policy payout not matching your actual losses.
We provide a list of insurance tips in Chapter 16.
Helping you adhere to contracts
Contracts are an inevitable part of any business. They exist to protect yourself and the other party in delivering on your agreement. But with a contract comes commitments. You consider both contractual and legal obligations at the early stage of setting up BC: identifying the key products and services that your business delivers. Therefore, when trouble hits you’ve considered, and most likely put in place, contingency plans to ensure that delivery happens.
In the event that you’re unable to deliver, because your contingency measure also fails or you decide to accept the risk of the failure occurring, you’re at least able to demonstrate that you were diligent in ensuring that your business didn’t breach the terms of the contract. Taking this precaution can assist in convincing your customer that legal action would be troublesome or, in the event of civil proceedings, that you took reasonable steps to avoid the failure.
Protecting profit
As a small business, making a profit and maintaining cash flow are priorities; after all, cash flow enables you to pay your bills. A high turnover can make the business appear to be doing well but can lead to cash flow problems and relentless pressure to maintain high sales volumes.
The profit that higher-margin products generate can be important to a business’s survival. Usually, products and services have high margins for one of the following reasons:
They have a unique selling point that distinguishes them from competitors.
They’re scarce and therefore demand is high (perhaps because a patent is in place).
The production costs are low, usually brought about by volume (economies of scale).
The supplier consistently delivers a quality product.
If your business has a product that accounts for a significant amount of its sales and delivers a higher margin, any reduction of this margin can have a significant impact on your business’s profit. High-margin products can be threatened for a number of reasons:
A competitor brings out a ‘me too’ product at a lower price.
A patent expires or a product is developed by competitors that does the same job but doesn’t infringe on the patent.
Demand decreases through substitution or tastes changing.
The cost of sales increases due to commodity price rises, existing supplier price increases or your having to turn to a more expensive supplier.
You’re unable to maintain quality or deliver consistently.
All these problems can result in your having to reduce the margin of products, just to be able to compete in the changed environment. Although BC can’t protect your business against all these issues, it can help your business avoid times when you’re forced to reduce your margin because of quality and/or delivery failings. BC can also provide some protection from supplier-driven price increases, because BC strategies encourage the use of alternative suppliers.