Last issue (February), we talked about insuring your most important employee (that would be you). This time, I’d like to talk about insuring your most important physical asset — your inventory.
The largest and most complex businesses work very hard at analyzing their exposure to loss. They don’t necessarily insure against all potential losses, but their decisions are based on a solid grasp of the exposure. In this column, I will give you some ideas on how you can do that for the most important business in your life — yours.
You probably have already purchased insurance to protect you from loss by theft or destruction of your inventory and your truck. That’s a good start, but there’s more to be considered.
Any business must consider the total financial impact of a loss. The money you have invested in your inventory is only the beginning. When you think about it, your business is all about increasing the value of our inventory by displaying it in your mobile showroom and getting customers interested in buying it.
When you have a serious loss, your ability to do that comes to a screeching halt. You can expect your insurance company to pay you the value of your truck and your cost of your inventory. But what happens to your gross profit that you would have earned while you are out of commission waiting for a new truck and new inventory? This is when cash flow becomes cash trickle.
What makes your business different from, for instance, a hardware store is the fact that you are mobile. A hardware store can buy a property insurance policy that protects against business interruption from loss to the business premises. But your “premises” are a truck, and while that doesn’t really change the exposure that much, it does mean that you will have to ask your agent if he or she can provide you with coverage that will replace your lost gross profit if your truck and/or inventory are lost. These exposures are known in the insurance industry as “time element” exposures. They are the result of the passage of time after the loss.
How serious is this exposure for you? You can easily get a rough idea by following these basic steps:
1. Guess how long it would take you to replace your truck. If you estimate fewer than four weeks, you are being too optimistic.
2. Determine your sales during this period of time. To be safe, use your best month. Subtract your normal expense, but NOT what you pay yourself. This will give you your gross profit.
3. Estimate your continuing business expense — such things as advertising, rent, insurance, truck payment, other loan payments — anything that would continue even if you were not doing business while your truck and inventory are being replaced.
The sum of 2 and 3 is your time element loss.
You’ll want to work with an insurance agent who is willing to take the time to understand your business and offer you coverage options so that you can make an informed decision about how to insure the goose that lays the golden eggs.
Of course, no matter what insurance you buy, you are always better off without a loss than with one. Safe business practices and good security features, such as alarms and GPS devices, can reduce the chances of your having a loss and, in many cases, qualify you for insurance discounts.
The information in this column is not intended to be a substitute for qualified legal or tax advice.
Steve Shechter is the president of Evans Insurance Agency in Akron, OH. He can be reached at [email protected] or (330) 535-8157.
