Do you really understand the risks you are taking?

New Zealand is full of small businesses and as statistics will tell us; as many as 80 per cent of these businesses will disappear in the next three years.

This will have a major impact on the financial lives of the owners. Many of whom will have their life savings in the business and their house mortgaged to keep the business going. Sound familiar?

Research has shown that there are three main reasons why many small businesses go bust:

• Cash flow
• Debt
• Key person death or disability.

So let's take a quick look at each of these risks:

Cash flow
It is very important that as a small business owner you keep a very close eye on your cash flow. Make sure you have a functional budget and make sure that you are regularly checking it. It is recommended that you set up a separate savings account to place funds aside for your tax obligations. If you have an accountant, see if they can help you set up an easy cash flow system to ensure that you have your finger tips on the pulse of your cash flows.

Debt

The four letter ‘D' word. Again be prudent in what you do and how you borrow funds. Make sure you have a business plan to ensure that any debt you take on is well covered by income and that it is productive debt. (A brand new Holden Ute does not fit in this area!) Your debt links directly with your cash flow and budget planning and it is important to ensure that in lean times you can still service the debt. It is important to remember that in sunny times lenders are more than happy to lend you an umbrella but when the clouds roll in they are the first to ask for it back! If you have debt in your business it is important to protect your debt repayments. If something goes wrong with a key person (you) the debt can be taken care of and the business has a chance of survival.

Key person
This is a major issue for many small businesses as most, if not all of these businesses, are totally reliant on one or two key people to generate the bulk of the revenue. So ask yourself what would happen to your business, your staff, your debts, your clients, your family if you were not able to work… or worse, you die and go upstairs. The death or major disability of a key person will leave many small businesses in financial ruin, which in turn tends to impact many financial lives as a result. It is important to know that businesses can insure their key persons which could mean the difference between financial failure or business continuity.

Philip Holland is the managing director for the Financial Independence group, Tauranga's leading specialist insurance and mortgage advisers.For further information please contact an adviser at Financial Independence 07 578 4414 or email info@yourbroker.co.nz. A Disclosure Statement is available free of charge on request.