Don’t let catastrophe ruin your business

While there has been a rapid growth in the number of small or medium-sized businesses in South Africa over the last few years, up to 80% of these go out of business within the first year of operation. One of the major reasons for this high failure rate is that new business owners are unaware of or fail to take seriously all the unexpected risks that owning their own business presents.

Results from a 2008 survey conducted by Global Entrepreneurship Monitor, which measures business start-ups, reveal that eight in every 100 adult South Africans owned a business that was less than three and a half years old. This is up from just over five per 100 measured every year between 2004 and 2006. At a national level, South Africa has approximately two million small businesses, representing 98% of the total number of firms in the country. Small enterprises employ about 55% of the country’s labour force and contribute approximately 42% to the country’s wage bill.

The global economic crisis has added momentum to the growing trend towards entrepreneurship as people in large companies are retrenched or face a slower career path. It is therefore imperative for the health of the economy that these businesses succeed. Unfortunately, while many of these people have great business ideas, they often come unstuck due to poor financial and risk management practices.

One of the keys to running a successful enterprise is ensuring you have the necessary business insurances in place. When starting a new business, cash flow is always an issue. Unfortunately, in an effort to keep costs down, many small business owners choose to forego insurance cover, believing that they will just be extra cautious about providing customers with a safe environment, or in the way they treat their equipment and property. We strongly discourage any new business owners from taking this approach as it is impossible to avoid all pitfalls all the time.

The following types of insurance are must-haves when it comes to cover for small businesses:

  • Fire cover to cover a potentially catastrophic loss such as stock or machinery due to a fire or storm.
  • Business Interruption cover to ensure that all operating costs including wages can be paid in the event of a catastrophic loss. The business owner would need to select the indemnity period, with options from 3 – 24 months, which is the maximum time expected to get the business back up and running at the level it was before the loss occurred.
  • Theft cover covers the business owner’s stock and equipment on a first-loss basis in the event of a robbery or hold-up.
  • Public liability cover to cover loss or damage to third party’s / third party property while on a business owner’s premises can also include products liability cover (i.e. if the business manufactures goods), defective workmanship cover (i.e. if the business repairs goods) and food poisoning (i.e. if the business produces or supplies food and beverages). Work away cover is also an additional extension to this cover which is designed for business owners who work on another client’s premises (i.e. like a contractor).
  • Motor cover. Small business owners can ill afford not to insure their tools of the trade such as vehicles – especially if the business relies on sales representatives or transportation and delivery of goods. It is important to ensure that the description of use for this insurance is correct and that the cover taken is as comprehensive as possible as there are various cover options available. Car hire following a loss under this cover is also critical to ensure minimal interruption once the vehicle is being repaired or the claim is being settled.

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